Notablecalls: Not advocating a long here but thought it's worthwhile to highlight this. Looks like CMG has always guided conservatively and then beaten the guide.
Friday, October 19, 2012
Chipotle (NYSE:CMG): 2013 SS guide - putting it into perspective
Notablecalls: Not advocating a long here but thought it's worthwhile to highlight this. Looks like CMG has always guided conservatively and then beaten the guide.
Tuesday, October 09, 2012
Netflix (NASDAQ:NFLX): Taking the money and running; see risk to streaming adds - Merrill
Merrill Lynch/BofA is downgrading Netflix (NASDAQ:NFLX) to Underperform from Buy this morning.
- With the stock up 31% in past two weeks, risks outweigh reward heading into Q3.
Since their upgrade on August 14th, several things have changed that make the firm unwilling to chase this stock after a 31% upward move in the last two weeks, including: 1) Amazon has continued its aggressive content acquisition, buying the Epix content as soon as it came off exclusivity with Netflix thus taking away the most valuable differential for marketing purposes (Epix has the closest thing either company has to recent Hollywood blockbuster content); 2) less comfort in Netflix’s ability to meet even the Street’s relatively low expectations of 6mn net additions to it domestic streaming business; and 3) less acquisition value support at these levels – Amazon is likely content to wait until Netflix is ex-growth in the US and thus cheaper before it considers an acquisition at >$4.09bn (current market capitalization plus some acquisition premium). This quarter reminds them a lot of last quarter, with heavy short covering driving the stock up post quarter end on no or limited news; a set-up the firm doesn't like to see in any hyper-volatile stock like Netflix.
Will it be 7mn, 6mn or 5mn net US streaming ads?
Early this year, Netflix put out a “soft” guidance target of 7mn net sub additions to its domestic streaming business. From their conversations, as well as Street estimates, it is clear that few if any believed this number from the get go and fewer believe it now. Merrill doesn't think the company needs to guide to 7mn net adds for the year (3.5mn in Q4 assuming Q3 is at 1.4mn, the mid-point of guidance), but less than the ~6mn that the Street is modeling could hurt the stock. They see net additions significantly below estimates as the biggest risk to the stock due to: 1) signals Netflix has reached the second inflection point on its penetration curve and 2) domestic streaming subs will plateau sooner than expected, pressuring FY13 ests (they are currently modeling 33mn domestic streaming FY13 subs).
Notablecalls: NFLX is up 17 pts since last Wednesday after the wonderful positive call from Citi (see below) and the relatively ill-timed upgrade from Morgan Stanley yesterday. As Merrill notes, this does remind a lot of last quarter, which ended in a rather painful 20 pt drop in stock price.
In my humble opinion, yesterday's move can solely be attributed to short squeeze as fast money traders attempted to fade the MSCO upgrade. I also suspect many of them ended up covering their shorts by end of day as the stock failed to cave.
These trading dynamics leave NFLX vulnerable to the downside today on the Merrill downgrade.
I'm thinking below $70 level today.
- With the stock up 31% in past two weeks, risks outweigh reward heading into Q3.
Since their upgrade on August 14th, several things have changed that make the firm unwilling to chase this stock after a 31% upward move in the last two weeks, including: 1) Amazon has continued its aggressive content acquisition, buying the Epix content as soon as it came off exclusivity with Netflix thus taking away the most valuable differential for marketing purposes (Epix has the closest thing either company has to recent Hollywood blockbuster content); 2) less comfort in Netflix’s ability to meet even the Street’s relatively low expectations of 6mn net additions to it domestic streaming business; and 3) less acquisition value support at these levels – Amazon is likely content to wait until Netflix is ex-growth in the US and thus cheaper before it considers an acquisition at >$4.09bn (current market capitalization plus some acquisition premium). This quarter reminds them a lot of last quarter, with heavy short covering driving the stock up post quarter end on no or limited news; a set-up the firm doesn't like to see in any hyper-volatile stock like Netflix.
Will it be 7mn, 6mn or 5mn net US streaming ads?
Early this year, Netflix put out a “soft” guidance target of 7mn net sub additions to its domestic streaming business. From their conversations, as well as Street estimates, it is clear that few if any believed this number from the get go and fewer believe it now. Merrill doesn't think the company needs to guide to 7mn net adds for the year (3.5mn in Q4 assuming Q3 is at 1.4mn, the mid-point of guidance), but less than the ~6mn that the Street is modeling could hurt the stock. They see net additions significantly below estimates as the biggest risk to the stock due to: 1) signals Netflix has reached the second inflection point on its penetration curve and 2) domestic streaming subs will plateau sooner than expected, pressuring FY13 ests (they are currently modeling 33mn domestic streaming FY13 subs).
Notablecalls: NFLX is up 17 pts since last Wednesday after the wonderful positive call from Citi (see below) and the relatively ill-timed upgrade from Morgan Stanley yesterday. As Merrill notes, this does remind a lot of last quarter, which ended in a rather painful 20 pt drop in stock price.
In my humble opinion, yesterday's move can solely be attributed to short squeeze as fast money traders attempted to fade the MSCO upgrade. I also suspect many of them ended up covering their shorts by end of day as the stock failed to cave.
These trading dynamics leave NFLX vulnerable to the downside today on the Merrill downgrade.
I'm thinking below $70 level today.
Wednesday, October 03, 2012
Netflix (NASDAQ:NFLX): It’s our “Screaming” Buy, Citi says.
Citigroup is out positive on Netflix (NASDAQ:NFLX) after their survey revealed surprisingly stable and improving customer satisfaction.
- Firm reiterates their Buy rating and $120 target.
Netflix remains one of the most controversial stocks they cover, Citi notes. It’s their “Screaming” Buy --they say “Buy,” people Scream. Risks here remain significant and include: a) Substantial Content Acquisition Requirements; b) Significant Competition; and c) Significant Uncertainty Re: NFLX’s International Investments. But they will stick with their Buy – highlighting what the firm views as a highly reasonable valuation, a generally positive execution track record, and the still early market opportunity for Internet Video Streaming. Three Updates:
1. Latest Proprietary Consumer Survey Suggests Satisfaction Inflection Point — Citi very recently re-ran their consumer survey (approx 3,800 U.S. Internet users, incl. 1,200+ current & 700 past NFLX subs). Key Takes: 1) Overall customer satisfaction with Netflix has begun to improve for the first time since last Summer’s "Apocaflix" – 48% of current NFLX subs are Very or Extremely Satisfied vs. 44% to 45% levels observed in Q1 & Q2; 2) In terms of Online Video destinations, Netflix’s competitive position continues to rise – the % of respondents listing Netflix as a top destination has increased from 25% in Q2:11 to 30% in Q1:12 to 35% today – although YouTube and Amazon are also showing gains; 3) Churn propensity appears to have improved YTD – the % “Not At All Likely To Churn” has reached a YTD record high of 57%; and perhaps most surprisingly…4) The perceived Streaming content selection appears to have improved – 37% believe that Streaming content availability has improved over the last 12 months vs. only 16% who believe it has worsened.
2. Relatively Neutral Q3 Traffic Trends To Netflix.com — Per comScore, Netflix’s U.S. Website visitors have declined 3% Y/Y in Jul & Aug, or a less worse trend vs. Q2’s 7% decline. And, 12.4MM unique visitors visited Netflix via Smartphones in Jul & Aug. That’s 43% Mobile traffic penetration. And a bit of a reminder that as a subscription service, NFLX benefits from Mobile usage growth – better consumer value proposition with no drag on monetization.
3. The Valuation Case – They continue to see NFLX generating almost $5.50 in U.S. EPS in 2013. That means one can buy NFLX U.S. at 10X P/E, with a free call option on NFLX International. That’s highly reasonable, in Citi's opinion.
Notablecalls: As many of you recall NFLX was a $200 stock when last summer's Apocaflix began. Not saying the decline was solely due to Qwikster etc. but with subs starting to accept the reduced level of content offered by the company, the extreme negative sentiment toward NFLX stock may start to fade.
If churn goes down -> net adds go up. And that's what people are looking for. That's material new info that may actually show up next time NFLX reports.
There is always the issue with international expansion but if the U.S. ops can carry the weight while international moves toward profitability, NFLX may indeed become investable again. NFLX seems at least on track to add 6MM Domestic Streaming subs in ’12 off a 22MM base (that’s hard-to-match growth & size);
This call has a fair chance to generate some meaningful buy/cover interest in the stock n-t.
I'm thinking toward $60/share today.
Screaming Buy.. eh. Nice.
- Firm reiterates their Buy rating and $120 target.
Netflix remains one of the most controversial stocks they cover, Citi notes. It’s their “Screaming” Buy --they say “Buy,” people Scream. Risks here remain significant and include: a) Substantial Content Acquisition Requirements; b) Significant Competition; and c) Significant Uncertainty Re: NFLX’s International Investments. But they will stick with their Buy – highlighting what the firm views as a highly reasonable valuation, a generally positive execution track record, and the still early market opportunity for Internet Video Streaming. Three Updates:
1. Latest Proprietary Consumer Survey Suggests Satisfaction Inflection Point — Citi very recently re-ran their consumer survey (approx 3,800 U.S. Internet users, incl. 1,200+ current & 700 past NFLX subs). Key Takes: 1) Overall customer satisfaction with Netflix has begun to improve for the first time since last Summer’s "Apocaflix" – 48% of current NFLX subs are Very or Extremely Satisfied vs. 44% to 45% levels observed in Q1 & Q2; 2) In terms of Online Video destinations, Netflix’s competitive position continues to rise – the % of respondents listing Netflix as a top destination has increased from 25% in Q2:11 to 30% in Q1:12 to 35% today – although YouTube and Amazon are also showing gains; 3) Churn propensity appears to have improved YTD – the % “Not At All Likely To Churn” has reached a YTD record high of 57%; and perhaps most surprisingly…4) The perceived Streaming content selection appears to have improved – 37% believe that Streaming content availability has improved over the last 12 months vs. only 16% who believe it has worsened.
2. Relatively Neutral Q3 Traffic Trends To Netflix.com — Per comScore, Netflix’s U.S. Website visitors have declined 3% Y/Y in Jul & Aug, or a less worse trend vs. Q2’s 7% decline. And, 12.4MM unique visitors visited Netflix via Smartphones in Jul & Aug. That’s 43% Mobile traffic penetration. And a bit of a reminder that as a subscription service, NFLX benefits from Mobile usage growth – better consumer value proposition with no drag on monetization.
3. The Valuation Case – They continue to see NFLX generating almost $5.50 in U.S. EPS in 2013. That means one can buy NFLX U.S. at 10X P/E, with a free call option on NFLX International. That’s highly reasonable, in Citi's opinion.
Notablecalls: As many of you recall NFLX was a $200 stock when last summer's Apocaflix began. Not saying the decline was solely due to Qwikster etc. but with subs starting to accept the reduced level of content offered by the company, the extreme negative sentiment toward NFLX stock may start to fade.
If churn goes down -> net adds go up. And that's what people are looking for. That's material new info that may actually show up next time NFLX reports.
There is always the issue with international expansion but if the U.S. ops can carry the weight while international moves toward profitability, NFLX may indeed become investable again. NFLX seems at least on track to add 6MM Domestic Streaming subs in ’12 off a 22MM base (that’s hard-to-match growth & size);
This call has a fair chance to generate some meaningful buy/cover interest in the stock n-t.
I'm thinking toward $60/share today.
Screaming Buy.. eh. Nice.
Wednesday, September 26, 2012
GT Advanced Tech (NASDAQ:GTAT) : Sapphire cover glass opportunity not there; Sell - Canaccord
Canaccord's Jonathan Dorsheimer downgrades GT Advanced Tech (NASDAQ:GTAT) this morning to Hold from Buy while lowering their price target to $6 (prev. $9).
- According to him, Asian meeting don't support the cover glass opportunity touted by management and Wall Street.
Despite the recent optimism and announcements, after speaking with many companies within the sapphire supply chain Dorsheimer concludes that the sapphire cover glass opportunity is not a near-term possibility using GTAT’s ASF method.
He agrees that sapphire covers can come at a premium, but the $10 to $20 price point that GT talks about are possibly consistent for aftermarket but remain 2-4x the target levels for adoption of an iPhone. Dorsheimer also agrees that by increasing charge size, changing things within the sapphire recipe like cycle time, perhaps quality, too, can reduce the cost of the crystal growth. However, the biggest roadblock that we have encountered from GT’s customers, its competitors and other equipment vendors is not necessarily the crystal growth, but the post processing.
Supplier consensus is so far that sapphire windows machined and polished from bulk sapphire boules range from the $25 to $40 for a 4” window – most of it coming from processing – well above the required range.
Asthey have previously indicated, this is an opportunity about which handset makers are seriously inquiring. However, Canaccord's meetings suggest this is Apple-driven and Samsung is heading towards more of a plastic-based OLED approach.
Canaccord says they learned that Apple has been investigating this opportunity since 2006, and Apple has signed NDA’s with many sapphire companies since. So far nobody has been able to resolve the cost/performance issues. They believe that the “signed agreements” GT has spoken about are of this nature and not purchase orders.
They continue to believe that the existence of active mobile sapphire opportunities (camera lens, SOS) and rumors of cover glass de-risks the company’s existing backlog, but they do not see any new large NT orders given what they conclude is a limited commercial opportunity.
Notablecalls: This is a significant call as Canaccord was first to upgrade GTAT on August 17, a day after management touted the sapphire cover glass oppy at Canaccords' growth conference. Other analysts followed and as you can see from the increased trading volume the comments didn't fall on deaf ears.
Now it appears lots of fast money types are buried in the name after the co so conveniently issued a convert and now Canaccord comes in saying all this sapphire hype was for..pretty much nothing. No Apple deals on the horizon, not by a long-shot.
Goldman murdered Veeco (NASDAQ:VECO) with their downgrade two days ago saying LED capital equipment market isn't going to recover much in '13-'14. Ugh.
I think this downgrade will take GTAT closer to $5/share level today. Below $5 in a week?
- According to him, Asian meeting don't support the cover glass opportunity touted by management and Wall Street.
Despite the recent optimism and announcements, after speaking with many companies within the sapphire supply chain Dorsheimer concludes that the sapphire cover glass opportunity is not a near-term possibility using GTAT’s ASF method.
He agrees that sapphire covers can come at a premium, but the $10 to $20 price point that GT talks about are possibly consistent for aftermarket but remain 2-4x the target levels for adoption of an iPhone. Dorsheimer also agrees that by increasing charge size, changing things within the sapphire recipe like cycle time, perhaps quality, too, can reduce the cost of the crystal growth. However, the biggest roadblock that we have encountered from GT’s customers, its competitors and other equipment vendors is not necessarily the crystal growth, but the post processing.
Supplier consensus is so far that sapphire windows machined and polished from bulk sapphire boules range from the $25 to $40 for a 4” window – most of it coming from processing – well above the required range.
Asthey have previously indicated, this is an opportunity about which handset makers are seriously inquiring. However, Canaccord's meetings suggest this is Apple-driven and Samsung is heading towards more of a plastic-based OLED approach.
Canaccord says they learned that Apple has been investigating this opportunity since 2006, and Apple has signed NDA’s with many sapphire companies since. So far nobody has been able to resolve the cost/performance issues. They believe that the “signed agreements” GT has spoken about are of this nature and not purchase orders.
They continue to believe that the existence of active mobile sapphire opportunities (camera lens, SOS) and rumors of cover glass de-risks the company’s existing backlog, but they do not see any new large NT orders given what they conclude is a limited commercial opportunity.
Notablecalls: This is a significant call as Canaccord was first to upgrade GTAT on August 17, a day after management touted the sapphire cover glass oppy at Canaccords' growth conference. Other analysts followed and as you can see from the increased trading volume the comments didn't fall on deaf ears.
Now it appears lots of fast money types are buried in the name after the co so conveniently issued a convert and now Canaccord comes in saying all this sapphire hype was for..pretty much nothing. No Apple deals on the horizon, not by a long-shot.
Goldman murdered Veeco (NASDAQ:VECO) with their downgrade two days ago saying LED capital equipment market isn't going to recover much in '13-'14. Ugh.
I think this downgrade will take GTAT closer to $5/share level today. Below $5 in a week?
Sandisk Corp (NASDAQ:SNDK): Time to sell - JMP
JMP Securities is making a somewhat out-of-consensus call this morning downgrading Sandisk Corp (NASDAQ:SNDK) to Market Perform from Outperform.
- Alex Gauna has been OP-rated in SNDK since 2009 when the stock was below $15.
JMP says they see near-term trading resistance ahead of 3Q12 results due to a combination of elevated expectations, recent sluggishness in NAND flash pricing improvements, computing and electronics market weakness, and iPhone 5 supply constraints.
Shares of SNDK have risen ~45% from early June lows (SOX +10%) on improving NAND pricing trends and the correct anticipation of its inclusion in the new iPhone 5. Firm believes these favorable developments are now fully reflected in the stock. Although fundamentals are now moving in the right direction for SanDisk and the NAND flash industry as a whole, weakness in computing trends and supply constraints are leading JMP to trim their previously more optimistic 2012 non-GAAP EPS estimate from $2.10 to $2.00 (Street $1.78). They are also revising down their FY13 non-GAAP EPS estimate from $4.00 to $3.50 (Street $3.07) to reflect lower intermediate-term gross margins that may stem from weaker end markets, Samsung looking to fill excess capacity, and Apple (MP) is coming to represent a greater percentage of sales. They view current SNDK trading levels of 13x PE/ FY13 as appropriate relative to our coverage universe average in the low- to mid-teens.
JMP sees near-term trading resistance ahead of 3Q12 results due to a combination of elevated expectations, recent slowing in NAND pricing improvements, computing end market weakness, and iPhone 5 supply constraints. Although inclusion in the iPhone 5 puts SanDisk in a good position to meet JMP's 3Q12 revenue growth assumption of +21% q/q (Street +17% q/q), they believe this is in the stock and that any wrinkle could weigh heavily on valuation as recently occurred when iPhone component peer Skyworks (MO, $40 PT, PE based) positively pre-announced, but not by enough.
It is likely premature to get overly upbeat on more rational NAND industry supply additions based on Toshiba's mid-summer announcement of a 30% production cut and a recent report out of Korea speculating that Samsung may reduce capital expenditures by up to 50% in 2013. In JPM's view, there is as much to worry over as cheer from the Toshiba moves represent a magnitude of downward adjustment not seen since the great recession. Also, whatever capex decisions Samsung ultimately makes for 2013, it will first have to absorb an almost 50% increase in capex (>$13B) slated for 2012, in the face of losing the iPhone 5 as a demand driver.
Reducing 2013 gross margin assumptions due to the following: 1) to account for recent weakness in computing market trends and our diminished view of Windows 8 and Ultrabooks as near- to intermediate-term SSD demand catalysts; 2) to bake in the potential of Samsung pricing pressures as it absorbs excess capacity; and 3) to reflect their expectation that Apple sales will drive lower than average gross margins due to the inclusion of its own custom NAND controller architecture.,
Notablecalls: I love it when an analyst changes his/her long-held view, especially when he/she has been so right as Gauna has been in SNDK.
He may be right this time around as well. Avian Securities pinged me with the following Friday afternoon:
SNDK feels heavy again today and I want point out our SNDK commentary from us yesterday.... The stock has had a great run as some competitors have discussed “improving fundamentals”. Other than stable pricing I’m not sure what they are seeing as improving other than more talk from producers saying they’ll cut CapEx (heard that before). This is the busiest time of year and there is plenty of supply. I think it’s time to be looking on the sell side of the name...might be a little early but upper end here and here is yesterdays comments.
9/20 NAND - SNDK, Toshiba, Samsung - We are not nearly as excited at NAND as street is right now. Yes iPhone 5 build and other tablet/phone builds have taken up some supply but without any significant dislocation. SSD demand is not where it needs to be this time of year. SD cards / USB drive sales are still awful. While smartphone builds are good, device loading isn’t growing. This should be seasonally strongest time for NAND consumption and at best we have seen flat pricing after a 6 month freefall. Also Chinese New Year upcoming and our contacts point out that this year only represents 4 days for build vs. 7 days last year. Memory users have front loaded purchases. We acknowledge commentary from memory makers around “restraint” regarding capacity additions but we see little in a positive catalysts now until next summer. Pricing is stable right now but dealer and broker feedback points to plenty of availability and short lead times as evidence of surplus supply. We’d be wary of any rally here.
Avian knows the space well and has made some terrific out-of-consensus calls in the past. So now you know what the smart money is thinking.
I expect SNDK to get hit today and in the n-t as these cautious views spread. Gauna plays the SWKS card so well- the stock got hit -25% merely because they didn't produce blow-out numbers. Could easily happen to SNDK.
Below $42/share today? Below $40 in a week?
- Alex Gauna has been OP-rated in SNDK since 2009 when the stock was below $15.
JMP says they see near-term trading resistance ahead of 3Q12 results due to a combination of elevated expectations, recent sluggishness in NAND flash pricing improvements, computing and electronics market weakness, and iPhone 5 supply constraints.
Shares of SNDK have risen ~45% from early June lows (SOX +10%) on improving NAND pricing trends and the correct anticipation of its inclusion in the new iPhone 5. Firm believes these favorable developments are now fully reflected in the stock. Although fundamentals are now moving in the right direction for SanDisk and the NAND flash industry as a whole, weakness in computing trends and supply constraints are leading JMP to trim their previously more optimistic 2012 non-GAAP EPS estimate from $2.10 to $2.00 (Street $1.78). They are also revising down their FY13 non-GAAP EPS estimate from $4.00 to $3.50 (Street $3.07) to reflect lower intermediate-term gross margins that may stem from weaker end markets, Samsung looking to fill excess capacity, and Apple (MP) is coming to represent a greater percentage of sales. They view current SNDK trading levels of 13x PE/ FY13 as appropriate relative to our coverage universe average in the low- to mid-teens.
JMP sees near-term trading resistance ahead of 3Q12 results due to a combination of elevated expectations, recent slowing in NAND pricing improvements, computing end market weakness, and iPhone 5 supply constraints. Although inclusion in the iPhone 5 puts SanDisk in a good position to meet JMP's 3Q12 revenue growth assumption of +21% q/q (Street +17% q/q), they believe this is in the stock and that any wrinkle could weigh heavily on valuation as recently occurred when iPhone component peer Skyworks (MO, $40 PT, PE based) positively pre-announced, but not by enough.
It is likely premature to get overly upbeat on more rational NAND industry supply additions based on Toshiba's mid-summer announcement of a 30% production cut and a recent report out of Korea speculating that Samsung may reduce capital expenditures by up to 50% in 2013. In JPM's view, there is as much to worry over as cheer from the Toshiba moves represent a magnitude of downward adjustment not seen since the great recession. Also, whatever capex decisions Samsung ultimately makes for 2013, it will first have to absorb an almost 50% increase in capex (>$13B) slated for 2012, in the face of losing the iPhone 5 as a demand driver.
Reducing 2013 gross margin assumptions due to the following: 1) to account for recent weakness in computing market trends and our diminished view of Windows 8 and Ultrabooks as near- to intermediate-term SSD demand catalysts; 2) to bake in the potential of Samsung pricing pressures as it absorbs excess capacity; and 3) to reflect their expectation that Apple sales will drive lower than average gross margins due to the inclusion of its own custom NAND controller architecture.,
Notablecalls: I love it when an analyst changes his/her long-held view, especially when he/she has been so right as Gauna has been in SNDK.
He may be right this time around as well. Avian Securities pinged me with the following Friday afternoon:
SNDK feels heavy again today and I want point out our SNDK commentary from us yesterday.... The stock has had a great run as some competitors have discussed “improving fundamentals”. Other than stable pricing I’m not sure what they are seeing as improving other than more talk from producers saying they’ll cut CapEx (heard that before). This is the busiest time of year and there is plenty of supply. I think it’s time to be looking on the sell side of the name...might be a little early but upper end here and here is yesterdays comments.
9/20 NAND - SNDK, Toshiba, Samsung - We are not nearly as excited at NAND as street is right now. Yes iPhone 5 build and other tablet/phone builds have taken up some supply but without any significant dislocation. SSD demand is not where it needs to be this time of year. SD cards / USB drive sales are still awful. While smartphone builds are good, device loading isn’t growing. This should be seasonally strongest time for NAND consumption and at best we have seen flat pricing after a 6 month freefall. Also Chinese New Year upcoming and our contacts point out that this year only represents 4 days for build vs. 7 days last year. Memory users have front loaded purchases. We acknowledge commentary from memory makers around “restraint” regarding capacity additions but we see little in a positive catalysts now until next summer. Pricing is stable right now but dealer and broker feedback points to plenty of availability and short lead times as evidence of surplus supply. We’d be wary of any rally here.
Avian knows the space well and has made some terrific out-of-consensus calls in the past. So now you know what the smart money is thinking.
I expect SNDK to get hit today and in the n-t as these cautious views spread. Gauna plays the SWKS card so well- the stock got hit -25% merely because they didn't produce blow-out numbers. Could easily happen to SNDK.
Below $42/share today? Below $40 in a week?
Friday, September 21, 2012
Doesn’t Taste Like Chicken: Upgrading US Containerboard Stocks - Deutsche
Deutsche's Paper & Packaging is eating a bit of crow this morning. They are increasing their probability of success estimate on the current containerboard hike from 50% to 75-80%.
They are upgrading the c'board names, again:
- International Paper (NYSE:IP), Rock-Tenn (NYSE:RKT), Packaging Corp. (NYSE:PKG) and KapStone (NYSE:KS) are all upgraded to Buy from Hold.
According to the firm, two factors have driven their change in view. First, was the Tuesday release of the August industry figures. It is hard to remain neutral in the face of a 115K/ton m/m drop in inventories to the lowest August level in decades & a 97.5% operating rate. Second, subsequent conversations with privately-held players across the trade convinced them that they have been too cautious. As a long-time acquaintance at a private integrated noted on Wednesday evening: 'it is veryunusual, . but we have no incremental tons available for the market.'
Firm says they don't like moving stock calls around rapidly, but they like being wrong even less. If the situation changes and you find yourself on the wrong side of an argument, it’s best to own-up and move forward. With some significant price gains almost certain to be posted in the trade papers this weekend, they are adjusting their ratings.
What will Pulp & Paper Week show for September price levels? This exercise is always a bit like dealing with the “Wizard of Oz” and has the feel of circular logic (let's see - 'you don't move until he moves, but he can't move until you do?’). However, based on additional discussions, DBAB's best “guess-timate” is that PPW will report an increase in the $40/ton range. Based on their channel checks, it would be hard to argue that all $50 is in place. If PPW moves $40/ton this month, the industry is apt to get the balance of the next month.
Off to the races?
While Deutsche team thinks containerboard stocks will trade up in reaction to a strong PPW “print” this weekend, it’s important to make a few points. First, there is no real shortage of bullish sentiment among analysts & investors and current share prices reflect a portion of that sentiment. Second, investors should remain realistic about what a more consolidated & better-managed containerboard sector might deliver financially. They have heard a few arguments about price & margin potential that strike as outlandish & silly. They think there is room for EBITDA margins & returns to improve – but within limits. A “best case” scenario for this industry would be improving margins to reasonable return levels and then focusing on greater stability across the cycle. The food & beverage can industry offers an interesting model. Pushing price too hard in the short-term will damage long-term value. There are always alternatives in packaging. The higher corrugated box prices rise, the greater the customer’s incentive to look at options like returnable plastic containers and shrink wrap. Moreover, higher containerboard prices increase the incentive for upstart players to add supply.
They haven't changed their #'s yet but here's the EPS sensitivity for a $50/ton price hike:
Notablecalls: Here's the Sept 10 call from DBAB that set it all in motion. It was followed by a downgrade from Longbow a week later that did most of the damage. Longbow is known for their quality checks.
I saw several firms defend the c'board stocks both publicly and in private so it has been a real battle. And now DBAB blinked, just ahead of late-Friday's data release.
As you can see from the above table a lot is at stake and emotions are running high.
I expect a squeeze in the space today. I'm somewhat at a loss as to how high people will bid these names but +4-5% could be the level.
If it doesn't taste, act or look like chicken but Chuck Norris says it's chicken, it's f*cking chicken.
They are upgrading the c'board names, again:
- International Paper (NYSE:IP), Rock-Tenn (NYSE:RKT), Packaging Corp. (NYSE:PKG) and KapStone (NYSE:KS) are all upgraded to Buy from Hold.
According to the firm, two factors have driven their change in view. First, was the Tuesday release of the August industry figures. It is hard to remain neutral in the face of a 115K/ton m/m drop in inventories to the lowest August level in decades & a 97.5% operating rate. Second, subsequent conversations with privately-held players across the trade convinced them that they have been too cautious. As a long-time acquaintance at a private integrated noted on Wednesday evening: 'it is veryunusual, . but we have no incremental tons available for the market.'
Firm says they don't like moving stock calls around rapidly, but they like being wrong even less. If the situation changes and you find yourself on the wrong side of an argument, it’s best to own-up and move forward. With some significant price gains almost certain to be posted in the trade papers this weekend, they are adjusting their ratings.
What will Pulp & Paper Week show for September price levels? This exercise is always a bit like dealing with the “Wizard of Oz” and has the feel of circular logic (let's see - 'you don't move until he moves, but he can't move until you do?’). However, based on additional discussions, DBAB's best “guess-timate” is that PPW will report an increase in the $40/ton range. Based on their channel checks, it would be hard to argue that all $50 is in place. If PPW moves $40/ton this month, the industry is apt to get the balance of the next month.
Off to the races?
While Deutsche team thinks containerboard stocks will trade up in reaction to a strong PPW “print” this weekend, it’s important to make a few points. First, there is no real shortage of bullish sentiment among analysts & investors and current share prices reflect a portion of that sentiment. Second, investors should remain realistic about what a more consolidated & better-managed containerboard sector might deliver financially. They have heard a few arguments about price & margin potential that strike as outlandish & silly. They think there is room for EBITDA margins & returns to improve – but within limits. A “best case” scenario for this industry would be improving margins to reasonable return levels and then focusing on greater stability across the cycle. The food & beverage can industry offers an interesting model. Pushing price too hard in the short-term will damage long-term value. There are always alternatives in packaging. The higher corrugated box prices rise, the greater the customer’s incentive to look at options like returnable plastic containers and shrink wrap. Moreover, higher containerboard prices increase the incentive for upstart players to add supply.
They haven't changed their #'s yet but here's the EPS sensitivity for a $50/ton price hike:
Notablecalls: Here's the Sept 10 call from DBAB that set it all in motion. It was followed by a downgrade from Longbow a week later that did most of the damage. Longbow is known for their quality checks.
I saw several firms defend the c'board stocks both publicly and in private so it has been a real battle. And now DBAB blinked, just ahead of late-Friday's data release.
As you can see from the above table a lot is at stake and emotions are running high.
I expect a squeeze in the space today. I'm somewhat at a loss as to how high people will bid these names but +4-5% could be the level.
If it doesn't taste, act or look like chicken but Chuck Norris says it's chicken, it's f*cking chicken.
Tuesday, September 18, 2012
Lamar Advertising (NASDAQ:LAMR): Worth $60/share as a REIT - Goldman Sachs
Goldman Sachs is upgrading Lamar Advertising (NASDAQ:LAMR) to Conviction Buy List from Neutral saying significant upside in store after REIT conversion.
- LAMR worth $60/share at median REIT stock multiple, Goldman says.
Source of opportunity
Goldman upgrades Lamar to Conviction Buy from Neutral, with 29% upside to their new $42 target price. LAMR expects to receive an IRS ruling on its REIT election in 1Q13 and they see a high probability of approval given a recent IRS ruling that established a billboard REIT precedent. While the REIT conversion is not a certainty (due to digital displays), they find the risk-reward compelling with at least 29% upside if election is completed vs. 15% downside if it falls through. Previous REIT conversions have outperformed and may serve as a template for LAMR. AMT/EQIX are up 75%/90% versus the S&P 500 up 30%/16%, since REIT conversion talk began.
Lamar is currently trading at 11X Goldman's 2013E AFFO estimate ($2.99 per share), which is a 45% discount to the REIT sector median and a 21% discount to the median for the bottom quintile of REIT stocks. Firm's revised $42 12-month target price is based on 14X 2013E AFFO, the median for the bottom quintile of REIT stocks. If Lamar traded at the median REIT stock multiple of 20X, then it would imply a value of $60.
If Lamar does receive REIT conversion in 1Q13, what should investors expect out of the stock? Broadly, Goldman expects the stock to perform better than peers as valuation moves to a REIT framework supported by higher trading multiples. However, given the 20% plus move in the stock since mid July and the deterioration in underlying outdoor advertising demand (same board digital revenue flat in 2Q), they believe the near-term price appreciation may be less muted until the IRS responds.
Since American Tower (AMT) announced its intention to convert to a REIT in May 2010, the stock is up over 70% compared with the S&P up 30%. Slightly less than half of that appreciation occurred within the one year period between AMT’s initial discussion of REIT conversion to the favorable IRS private letter ruling in May 2011. From the time that AMT’s board of directors approved the REIT conversion in late May 2011, the stock is up 34% compared with the market up 6%. While LAMR shares are up more than 20% since July, due to REIT conversion speculation, the AMT exhibit suggests that LAMR shares could significantly outpace the market over the next year.
Notablecalls: REIT conversion - the pair of words that gets people excited these days as evidenced by LAMR's 15% jump on August 8 when the company first officially commented on the topic.
The moves produced by EQIX, AMT and WY following REIT conversion news have investors salivating for more. Now we have Goldman saying it's very likely Lamar (LAMR) can and will convert into a REIT, potentially doubling its current valuation.
I suspect investors will not wait for next year to catch the upside. They will move in to buy the stock now. The upside is that big - possibly as high as 100%.
Provided it already traded as high as $35-36/share on the REIT news a month ago, I expect the stock to produce a sizable move on this Goldman blessing.
Thinking back toward $35 today. Use possible pull backs to scale in.
Definitely one to consider as a longer-term hold as well.
- LAMR worth $60/share at median REIT stock multiple, Goldman says.
Source of opportunity
Goldman upgrades Lamar to Conviction Buy from Neutral, with 29% upside to their new $42 target price. LAMR expects to receive an IRS ruling on its REIT election in 1Q13 and they see a high probability of approval given a recent IRS ruling that established a billboard REIT precedent. While the REIT conversion is not a certainty (due to digital displays), they find the risk-reward compelling with at least 29% upside if election is completed vs. 15% downside if it falls through. Previous REIT conversions have outperformed and may serve as a template for LAMR. AMT/EQIX are up 75%/90% versus the S&P 500 up 30%/16%, since REIT conversion talk began.
Lamar is currently trading at 11X Goldman's 2013E AFFO estimate ($2.99 per share), which is a 45% discount to the REIT sector median and a 21% discount to the median for the bottom quintile of REIT stocks. Firm's revised $42 12-month target price is based on 14X 2013E AFFO, the median for the bottom quintile of REIT stocks. If Lamar traded at the median REIT stock multiple of 20X, then it would imply a value of $60.
If Lamar does receive REIT conversion in 1Q13, what should investors expect out of the stock? Broadly, Goldman expects the stock to perform better than peers as valuation moves to a REIT framework supported by higher trading multiples. However, given the 20% plus move in the stock since mid July and the deterioration in underlying outdoor advertising demand (same board digital revenue flat in 2Q), they believe the near-term price appreciation may be less muted until the IRS responds.
Since American Tower (AMT) announced its intention to convert to a REIT in May 2010, the stock is up over 70% compared with the S&P up 30%. Slightly less than half of that appreciation occurred within the one year period between AMT’s initial discussion of REIT conversion to the favorable IRS private letter ruling in May 2011. From the time that AMT’s board of directors approved the REIT conversion in late May 2011, the stock is up 34% compared with the market up 6%. While LAMR shares are up more than 20% since July, due to REIT conversion speculation, the AMT exhibit suggests that LAMR shares could significantly outpace the market over the next year.
Notablecalls: REIT conversion - the pair of words that gets people excited these days as evidenced by LAMR's 15% jump on August 8 when the company first officially commented on the topic.
The moves produced by EQIX, AMT and WY following REIT conversion news have investors salivating for more. Now we have Goldman saying it's very likely Lamar (LAMR) can and will convert into a REIT, potentially doubling its current valuation.
I suspect investors will not wait for next year to catch the upside. They will move in to buy the stock now. The upside is that big - possibly as high as 100%.
Provided it already traded as high as $35-36/share on the REIT news a month ago, I expect the stock to produce a sizable move on this Goldman blessing.
Thinking back toward $35 today. Use possible pull backs to scale in.
Definitely one to consider as a longer-term hold as well.
Monday, September 17, 2012
Gambardella @ Metals: The squeeze is over. Sell.
J.P. Morgan's metals whiz Michael Gambardella is downgrading the North American Metals & Mining space this morning:
Among the most interesting names:
- Cliffs Natural (NYSE:CLF) to Neutral from Overweight with $36 price target (prev. $55)
- U.S. Steel (NYSE:X) to Neutral from Overweight with $29 price target (prev. $43)
- Others downgraded include AKS, RS and MUSE.
Since Friday September 7, the steel stocks (including CLF) are up roughly 13% compared to a 2% gain in the S&P 500. Gambardella thinks this jump is largely from the announcement of China's infrastructure spend and QE3 which likely pressured the extremely negative consensus view held by most investors on the group. However, he views the recent move up in the stocks largely as short covering, notably the recent appreciation of CLF after short interest as a percent of float reached levels last seen in late 2007. He does not think the fundamentals are supportive of a continued move higher beyond this recent short covering and expects steel prices to decline soon.
Steel prices likely to decline further
After their run up from the high $500/ton range several months ago to recent highs of around $670-680/ton, JPM expects hot-rolled sheet steel prices in the U.S. to decline further from current levels of roughly $645/ton despite relatively positive supply/demand fundamentals. In their view, scrap prices appear to be overvalued (especially to iron ore) and set to drop, which should cause scrap-based minimills such as NUE and STLD to drop their flat-rolled prices. They also believe that some of the recent run up in steel prices could be partially due to increased buying as a precaution ahead of the possibility of a strike at X and/or MT as they renegotiated their labor contracts. However, both X and MT have reached tentative agreements, and they think buyers are likely to move to the sidelines over the next month. The election season is also likely to weigh on demand, as consumers of steel are likely to be cautious until the election is over and there is some resolution on whether the "fiscal cliff" will be averted. Most importantly, JPM also believes that raw material prices (iron ore, met coal and scrap) will not be supportive of higher global steel prices given their recent declines and their forecasts for not much of a rebound.
Demand is near pre-crisis levels. Gambo doesn't believe that demand is a significant contributor to still weak (compared to pre-crisis levels) steel earnings. Total steel apparent consumption (both flat and long products) YTD July 2012 is at 93% of comparable 2008 level. Flat-rolled apparent consumption YTD in 2012 is at 94% of comparable 2008 levels. On the supply side, he does recognize that a significant reduction on North American capacity could potentially benefit the industry, but don’t foresee any significant cuts in the near-term beyond the June bankruptcy of RG and shutdown of its assets.
Downgrading AKS, CLF, MUSA, RS and X to N from OW. JPM thinks AKS, CLF and X's fixed cost advantages will be muted in a lower priced steel and raw material cost environment while MUSA and RS’ earnings should be squeezed by lower steel prices and are trading at or near their 52 week highs.
Notablecalls: Gambardella is the Axe in the space and his decision to back off from his positive stance will hurt the space today and in the coming days.
- Cliffs Natural (NYSE:CLF) has been the poster boy of the recent squeeze, with the stock up almost 50% in mere 10 days. I have counted at least 5 firms trying to chop it down with downgrades and their clients sure have the tire marks on their backs to prove it.
Now Gambo comes in and says it's all been a big squeeze. Nothing fundamental. It's not getting any better from here. That's the beauty of the call. That's why Gambo is the Axe.
- U.S. Steel (NYSE:X) will also work. I see CRT also cutting smaller peer AKS after their recent well-timed upgrade as steel price headwinds worsen (AKS warned on Friday). That will add fuel to the fire.
I see X, CLF down 6-8% today. The squeeze is over. Use any bounces to scale in (I hope there will be some!)
Among the most interesting names:
- Cliffs Natural (NYSE:CLF) to Neutral from Overweight with $36 price target (prev. $55)
- U.S. Steel (NYSE:X) to Neutral from Overweight with $29 price target (prev. $43)
- Others downgraded include AKS, RS and MUSE.
Since Friday September 7, the steel stocks (including CLF) are up roughly 13% compared to a 2% gain in the S&P 500. Gambardella thinks this jump is largely from the announcement of China's infrastructure spend and QE3 which likely pressured the extremely negative consensus view held by most investors on the group. However, he views the recent move up in the stocks largely as short covering, notably the recent appreciation of CLF after short interest as a percent of float reached levels last seen in late 2007. He does not think the fundamentals are supportive of a continued move higher beyond this recent short covering and expects steel prices to decline soon.
Steel prices likely to decline further
After their run up from the high $500/ton range several months ago to recent highs of around $670-680/ton, JPM expects hot-rolled sheet steel prices in the U.S. to decline further from current levels of roughly $645/ton despite relatively positive supply/demand fundamentals. In their view, scrap prices appear to be overvalued (especially to iron ore) and set to drop, which should cause scrap-based minimills such as NUE and STLD to drop their flat-rolled prices. They also believe that some of the recent run up in steel prices could be partially due to increased buying as a precaution ahead of the possibility of a strike at X and/or MT as they renegotiated their labor contracts. However, both X and MT have reached tentative agreements, and they think buyers are likely to move to the sidelines over the next month. The election season is also likely to weigh on demand, as consumers of steel are likely to be cautious until the election is over and there is some resolution on whether the "fiscal cliff" will be averted. Most importantly, JPM also believes that raw material prices (iron ore, met coal and scrap) will not be supportive of higher global steel prices given their recent declines and their forecasts for not much of a rebound.
Demand is near pre-crisis levels. Gambo doesn't believe that demand is a significant contributor to still weak (compared to pre-crisis levels) steel earnings. Total steel apparent consumption (both flat and long products) YTD July 2012 is at 93% of comparable 2008 level. Flat-rolled apparent consumption YTD in 2012 is at 94% of comparable 2008 levels. On the supply side, he does recognize that a significant reduction on North American capacity could potentially benefit the industry, but don’t foresee any significant cuts in the near-term beyond the June bankruptcy of RG and shutdown of its assets.
Downgrading AKS, CLF, MUSA, RS and X to N from OW. JPM thinks AKS, CLF and X's fixed cost advantages will be muted in a lower priced steel and raw material cost environment while MUSA and RS’ earnings should be squeezed by lower steel prices and are trading at or near their 52 week highs.
Notablecalls: Gambardella is the Axe in the space and his decision to back off from his positive stance will hurt the space today and in the coming days.
- Cliffs Natural (NYSE:CLF) has been the poster boy of the recent squeeze, with the stock up almost 50% in mere 10 days. I have counted at least 5 firms trying to chop it down with downgrades and their clients sure have the tire marks on their backs to prove it.
Now Gambo comes in and says it's all been a big squeeze. Nothing fundamental. It's not getting any better from here. That's the beauty of the call. That's why Gambo is the Axe.
- U.S. Steel (NYSE:X) will also work. I see CRT also cutting smaller peer AKS after their recent well-timed upgrade as steel price headwinds worsen (AKS warned on Friday). That will add fuel to the fire.
I see X, CLF down 6-8% today. The squeeze is over. Use any bounces to scale in (I hope there will be some!)
Tuesday, September 11, 2012
Notable Calls on Twitter @ thenotablecalls
Today was a perfect example why one should use both the Notable Calls blog and twitter:
- This morning Think Equity analyst Yun Kim made a seemingly big call on TIBCO Software (NASDAQ:TIBX) saying their checks uncovered significant internal issues that led the firm downgrade their rating on the co. I speculated the call would cause a 7-10% decline in the stock and lo and behold I was right.
- Yet, after being down -10% on the day the stock started a slowish recovery until about 12:20 AM ET a fellow trader on Notable Calls Network (NCN) pinged me with the following:
'12:20 ..hearing UBS saying Think Equity is wrong on TIBX.....would be aggressive buyers now !!!'
Shortly after blasting the call to other NCN members I tweeted the call on twitter. As you can see the stock proceeded with a 2 pts+ recovery after Merrill Lynch/Bofa defended the name a while later and the co itself put out a 8-K denying any job cuts.
Beautiful action any way you slice it.
Join us on twitter @ thenotablecalls
- This morning Think Equity analyst Yun Kim made a seemingly big call on TIBCO Software (NASDAQ:TIBX) saying their checks uncovered significant internal issues that led the firm downgrade their rating on the co. I speculated the call would cause a 7-10% decline in the stock and lo and behold I was right.
- Yet, after being down -10% on the day the stock started a slowish recovery until about 12:20 AM ET a fellow trader on Notable Calls Network (NCN) pinged me with the following:
'12:20 ..hearing UBS saying Think Equity is wrong on TIBX.....would be aggressive buyers now !!!'
Shortly after blasting the call to other NCN members I tweeted the call on twitter. As you can see the stock proceeded with a 2 pts+ recovery after Merrill Lynch/Bofa defended the name a while later and the co itself put out a 8-K denying any job cuts.
Beautiful action any way you slice it.
Join us on twitter @ thenotablecalls
Actionable Call Alert: Tibco Software (NASDAQ:TIBX)
It's been a while but Think Equity's Yun Kim is out with a potentially devastating call on TIBCO Software (NASDAQ:TIBX) downgrading the name to Hold from Buy with $32 price target (prev. $36) after their checks revealed lingering organizational issues.
- 10% headcount reduction planned in U.S.
Kim notes additional checks since early last week suggest that there could be some organizational issues lingering in the Americas region, which may result in a reduction in the workforce for the region. They believe it could be a sizable number (maybe up to 10% of the region's headcount) across all functional groups. Firm notes that there were 1,561 employees in the Americas region at the end of FY11. Kim believes some of the reduction is associated with the company's efforts to streamline its operation given the numerous acquisitions it has made over the past several years. However, they also believe that some of the reduction is reflective of lingering organizational and sales execution issues in the Americas region and could signal more modest growth in the region going forward, at least in the near-term.
Kim notes that the company's head of the Americas region left after the end of F2Q due to performance issues. Given that shares are trading at a premium to its peers, the firm expects shares to be under pressure if the company implements a sizable headcount reduction plan, which they believe many investors will interpret as a sign that the company's business trends are turning negative.
They are reducing their license and total revenue estimates going forward, but are maintaining their F3Q top-line estimates given their positive checks, especially in its European region. Think Equity is also raising their margins and EPS estimates to reflect possible headcount reduction and tighter cost controls going forward.
Notablecalls: Actionable Call Alert!
Here's why:
- On July 5, another big-data player Informatica (NASDAQ:INFA) issued a warning blaming mostly internal (sales) execution issues. This resulted in over 30% haircut to share price:
- 10% headcount reduction planned in U.S.
Kim notes additional checks since early last week suggest that there could be some organizational issues lingering in the Americas region, which may result in a reduction in the workforce for the region. They believe it could be a sizable number (maybe up to 10% of the region's headcount) across all functional groups. Firm notes that there were 1,561 employees in the Americas region at the end of FY11. Kim believes some of the reduction is associated with the company's efforts to streamline its operation given the numerous acquisitions it has made over the past several years. However, they also believe that some of the reduction is reflective of lingering organizational and sales execution issues in the Americas region and could signal more modest growth in the region going forward, at least in the near-term.
Kim notes that the company's head of the Americas region left after the end of F2Q due to performance issues. Given that shares are trading at a premium to its peers, the firm expects shares to be under pressure if the company implements a sizable headcount reduction plan, which they believe many investors will interpret as a sign that the company's business trends are turning negative.
They are reducing their license and total revenue estimates going forward, but are maintaining their F3Q top-line estimates given their positive checks, especially in its European region. Think Equity is also raising their margins and EPS estimates to reflect possible headcount reduction and tighter cost controls going forward.
Notablecalls: Actionable Call Alert!
Here's why:
- On July 5, another big-data player Informatica (NASDAQ:INFA) issued a warning blaming mostly internal (sales) execution issues. This resulted in over 30% haircut to share price:
Here's the release:
http://www.informatica.com/us/company/news-and-events-calendar/press-releases/07052012-preliminary-q2-results.aspx
- Tibco trades around 25x EPS which means execution needs to be flawless. If Kim's right, Tibco shareholders are in for some big time volatility.
I'm guessing 7-10% downside in the n-t for TIBX putting $29-30/share levels in play. Use possible bounces to scale in.
Monday, September 10, 2012
Actionable Call Alert: Containerboard (NYSE:IP, PKG, RKT, KS)
Deutsche Bank's Paper & Forest Products team is making a significant call this morning downgrading their Containerboard space after their checks revealed the widely anticipated autumn price hike may note materialize:
- International Paper (NYSE:IP) to Hold from Buy with $39 price target (prev. $41)
- Packaging Corp. of America (NYSE:PKG) to Hold from Buy with $34 price target (prev. unch)
- Rock-Tenn (NYSE:RKT) to Hold from Buy with $75 price target (prev. $80)
- Kapstone (NYSE:KS) to Hold from Buy with $23 price target (prev. $24)
Over the last 7-8 weeks, the stocks have rallied sharply (up 30-40% in some cases) in anticipation of an autumn price hike. While the market seems to be assuming the hike is a "done deal", the firm notes they are not convinced. They think real questions remain about whether producers can implement & then maintain the increase. If anything, they've become a bit more cautious. Thus, in firm's view, the prudent move is to take a step back from their Buy recommendations.
Since the price hike announcements began to emerge in mid-July, the backdrop for the initiative has gotten murkier
Last week's sub-50 reading on the ISM manufacturing index is a cautionary sign for future containerboard & box demand. At the industry level, the continuing downward drift in old corrugated container (OCC) signals lackluster demand and reduced costs for producers of recycled containerboard. Finally, reports of quiet downtime by at least one major producer raise the question of just "how tight?" the market really is at the moment. While the firm had initially viewed the prospects of a successful hike at 60-70%, they now view the odds at only 50%. A 50/50 handicapping of the price hike is hardly bearish. However, given the optimistic expectations priced into the stocks, it's hard to argue that these stocks need to be our "conviction list".
Unfortunately, they think the Street has placed too much emphasis on this hike attempt as a litmus test of a newly consolidated & restructured industry
As a result, if the price hike fails, the short-term negative reaction in the stocks could prove dramatic. We think the emphasis on & interpretation of the hike is being overdone. While consolidation & more disciplined management should help investment returns over time, they aren't enough to over-ride economic fundamentals. Raising prices in the face of a global economic slowdown, flattish domestic demand and falling costs is a tall order for any industry.
Containerboard price forecasts remain unchanged
As they have not assumed any benefit from the hike in their 2012 estimates, Deutsches's current EPS forecasts remain unchanged. They will continue to monitor supply/demand fundamentals as well as pricing behavior in the market.
Notablecalls: Actionable Call Alert. Most of these names will be down 7-10% on this. Here's why:
- It was DBAB's team that made the initial positive call in the space back on July 10:
A few months back, we didn’t expect to be talking about an autumn price initiative. But, . . . here we go. Over the next several days, DB believes we could hear about containerboard price hike announcements in the $40-60/ton range.
Now let's look at the charts:
- International Paper (NYSE:IP) to Hold from Buy with $39 price target (prev. $41)
- Packaging Corp. of America (NYSE:PKG) to Hold from Buy with $34 price target (prev. unch)
- Rock-Tenn (NYSE:RKT) to Hold from Buy with $75 price target (prev. $80)
- Kapstone (NYSE:KS) to Hold from Buy with $23 price target (prev. $24)
Over the last 7-8 weeks, the stocks have rallied sharply (up 30-40% in some cases) in anticipation of an autumn price hike. While the market seems to be assuming the hike is a "done deal", the firm notes they are not convinced. They think real questions remain about whether producers can implement & then maintain the increase. If anything, they've become a bit more cautious. Thus, in firm's view, the prudent move is to take a step back from their Buy recommendations.
Since the price hike announcements began to emerge in mid-July, the backdrop for the initiative has gotten murkier
Last week's sub-50 reading on the ISM manufacturing index is a cautionary sign for future containerboard & box demand. At the industry level, the continuing downward drift in old corrugated container (OCC) signals lackluster demand and reduced costs for producers of recycled containerboard. Finally, reports of quiet downtime by at least one major producer raise the question of just "how tight?" the market really is at the moment. While the firm had initially viewed the prospects of a successful hike at 60-70%, they now view the odds at only 50%. A 50/50 handicapping of the price hike is hardly bearish. However, given the optimistic expectations priced into the stocks, it's hard to argue that these stocks need to be our "conviction list".
Unfortunately, they think the Street has placed too much emphasis on this hike attempt as a litmus test of a newly consolidated & restructured industry
As a result, if the price hike fails, the short-term negative reaction in the stocks could prove dramatic. We think the emphasis on & interpretation of the hike is being overdone. While consolidation & more disciplined management should help investment returns over time, they aren't enough to over-ride economic fundamentals. Raising prices in the face of a global economic slowdown, flattish domestic demand and falling costs is a tall order for any industry.
Containerboard price forecasts remain unchanged
As they have not assumed any benefit from the hike in their 2012 estimates, Deutsches's current EPS forecasts remain unchanged. They will continue to monitor supply/demand fundamentals as well as pricing behavior in the market.
Notablecalls: Actionable Call Alert. Most of these names will be down 7-10% on this. Here's why:
- It was DBAB's team that made the initial positive call in the space back on July 10:
A few months back, we didn’t expect to be talking about an autumn price initiative. But, . . . here we go. Over the next several days, DB believes we could hear about containerboard price hike announcements in the $40-60/ton range.
Now let's look at the charts:
- CSFB upgraded the space on August 13 driving the names even higher over the next weeks. The reason for the upgrade? You guessed it. Expected containterboard price hikes!
With DBAB team now coming out saying they are not so sure the price hikes will stick, some of that money put to work in the space will need to reverse. Millions of shares will need to be unloaded. This will take weeks.
Mark Wilde and Debbie Jones from DBAB's Paper & Forest Products team have done wonderful work in the space. Give kudos when it's due. I do!
Tuesday, September 04, 2012
Gamestop (NYSE:GME): Tactical opportunity as title and hardware drought breaks; up to Buy - Goldman Sachs
Goldman Sachs is upgrading Gamestop (NYSE:GME) to Buy from Hold with a 12-month price target of $25 (prev. $20) on a combination of higher operating assumptions from new software and hardware as well as assuming share repurchases supplement dividends to the point of reaching 90% of FCF returned.- Goldman's estimates stand about 14% above consensus.
They see outperformance of GME shares for three reasons:
1) 2012’s ytd declines have been largely driven by supply rather than demand, and supply will improve in 2H12. As stronger releases hit shelves in 2H12, Goldman expects industry declines to slow, improving sentiment around GME shares.
2) Consensus estimates are not fully factoring in the launch of the Wii U and its impact on 2013 revenue. Even if the Wii U underperforms the original Nintendo Wii by 50%, it will contribute 13 points of growth to software sales. Given the strong lineup of already announced titles for 1H13 and the soft comp from 1H12, the firm expects EPS of $3.82 for GME – 14% above consensus.
3) GME’s cash dividends and share buybacks provide an attractive cash return to shareholders, and build in support for the shares. Given the ~19% FCF yield and ~5.5% dividend yield, they see downside risk somewhat tempered in the near term. GME has returned 114% of FCF over the 12 months ending in April, and the firm doesen't think consensus reflects the consistency of its share repurchases. Its dividend yield is the highest in Goldman's Hardlines coverage, with Staples the closest at 4%, while on a rent-adjusted EV/EBITDAR basis GME trades at 3.9x 2013E vs BestBuy at 4.7x, and office retailers at an average of 5.7x.
While they share investor concerns about the long-term state of physical retail for games in an increasingly digital environment, and reflect this in their 6.5x target EPS multiple, Goldman believes for core console based games disruption of the retail based model is unlikely for the next 2 years given 1) limited hard drive space on consoles today, 2) mass adoption of the next generation of Microsoft or Sony consoles not until 2-3 years after a 2013 launch, or 2015-16, and 3) consumer preference for the salvage value of used games.
* And now for the most interesting part of the call: History of GME shares around console launches
GameStop shares have historically appreciated drastically following the launch of a new console cycle, even when market sentiment leading up to the launch is very negative.
Investor behavior appears similar to the last console cycle.
Leading up to the launch of Microsoft’s Xbox 360 (which ushered in the current console cycle), there was a great deal of negative sentiment surrounding GME shares, as is evidenced by the spike to nearly 50% short interest in October of 2005 – mere weeks before the console’s launch. At that time, there was concern that the new consoles would see poor adoption rates, and that due to the console’s improved internet connectivity, digital distribution might cut GME out of the channel. Short interest went on to plummet for the next year while GME share prices appreciated over 50% in the same period. In the two years following the launch of the current generation’s first console, GME share prices more than tripled.
While Goldman acknowledges that the competitive landscape for gaming has changed since 2005, they still believe that the concerns about adoption rates and digital distribution are overdone, at least for the next two years given 1) no new disruptive console from Microsoft or Sony until late 2013 at the earliest, and 2) a further 2-4 year lag beyond that
for mass adoption.
Notablecalls: Goldman has been Neutral-rated in GME since 2009 and looks like they are calling for another big upside move in the name similar to what we saw in '05-'06. This should generate ample amount of interest, especially given the 40% short interest.
Investors consider the business model broken but Goldman says it ain't so. Digital distribution will be just another part of GME's business.
Also, we may have a big catalyst in the form of Nintendo's Sept 13th press event where they are expected to announce Wii U along with the launch date. We are now in the 8th year of the current console cycle and the Wii U will represent the start of a new one, which is a positive for GME.
The stars may finally be aligning for them.
I'm guessing the stock will be trading closer to $20/sh level today and possibly higher in the coming weeks. All-in-all this is more of a solid L-T call.
Tuesday, August 28, 2012
ASML Holding (NASDAQ:ASML): End of 28nm Foundry Bookings Era? - Deutsche
Deutsche Bank's Semicap Equipment team is making a sizable negative call in the space saying they see downside risk to expectations of robust foundry spending environment in 2013.Firm is downgrading:
- KLA-Tencor (NASDAQ:KLAC) to Sell from Hold with a $44 price target (prev. $56)
- ASML Holding (NASDAQ:ASML) to Sell from Hold with a EUR 35 price target (prev. EUR 40)
Overall Thoughts
Deutsche sees downside risk to expectations of robust foundry spending environment in 2013 and believes uptick in memory spending would not be sufficient to offset potential foundry weakness driving downside risk to consensus view of flattish WFE spending outlook for 2013. Although bookings momentum could likely remain strong for select WFE names in 1H13, recent positive share price momentum suggests this view is likely discounted in semicap stocks. Moreover, mgmt teams have already been calling for seasonal pick-up in foundry spending from later this year and as such, the firm views the set-up as less favorable for semicap stocks.
End of Foundry 28nm Bookings Era
Peaking smart device momentum, stagnating die size growth along with ~75-80% completion of peak 28nm capacity adds exiting 2012 timeframe suggest 2013 foundry spending could potentially decline 15-20% YoY versus current expectations of flat to up 10%. With 28nm foundry capacity potentially reaching 230-250k wspm exiting 2012 and peak 28nm capacity less likely to exceed 275-300k wspm they see increasing risk of a much more muted foundry bookings environment in 1H13 and do not expect potential increase in 20nm spending to offset 28nm spending decline. Even in a scenario where strong 1H seasonality experienced by the foundries plays out in 2013, the firm sees a sharp decline in 2H13 foundry bookings.
1) Growth rate of mobility devices may have peaked in 2012
Strong growth of mobility devices has been one of the primary growth drivers for the foundry sector. Deutsche agrees that mobility devices growth would likely continue over the next few years. However, when it comes to the chip capacity required to build these devices, they believe there is an important misconception in the market - it is not the absolute number of smart devices built that drives the required silicon wafer capacity.
2) Die size growth is also likely stagnating
In addition to device unit growth, another common argument driving foundry spending optimism is the perception that die sizes have been increasing over the past few years and would continue to increase going forward. The majority of discussion about die size growth has been extrapolated from the fact that over the past 3 years, die sizes for Apple’s application processor chips for the iPhone and iPad have grown from 53mm2 (the A4 chip) to 163mm2 (the A5X chip). There have been die size increases for other chips as well (for instance, NVIDIA’s Tegra), but given Apple’s dominance in smart phones and tablets, they believe Apple’s die size increases have disproportionately driven this perception.
Downgrading ASML (covered by Kai Korschelt), KLAC to Sell
Slowing 32/28nm foundry capacity additions and an only modest 22/20nm ramp in 2H13 could drive material foundry bookings decline for ASML over the next 12mths, with 2013 EPS potentially declining YoY, 27% below consensus. Deutsche lowers their price target from E40 to E35. KLAC's 2012 foundry orders imply the foundry segment is on pace to ~150k wspm incremental process control capacity, well above the 90-100k wspm capacity projections from semicap companies. Coupled with the fact that 28nm yields are finally increasing and process control intensity at 20nm node could potentially decline (less process variants at 20nm, no 20nm tool upgrade cycle such as SP3 for 28nm, stagnating die sizes), they see risk of multiple quarters of bookings slowdown in 2013. With shares trading near 52-week highs, at a premium valuation and considering high investor expectations, the firm recommends investors take profits as they see downside to ~$40-$45 levels. Lower price target from $56 to $44.
Notablecalls: This is a big call, DBAB pretty much busts 2 significant myths related to smartphone/tablet and Apple chip momentum and its' effect on Semi capex.
While not mentioned in the above summary of the call, Deutsche is throwing some cold water on ASML's UEV (extreme ultraviolet) revolution saying the Bull case is already pretty much priced in here, despite '15-'16 roadmap. UEV is the reason why Intel and Samsung have made $1bln+ commitments to ASML in recent months helping to push the stock higher.
All in all, I think ASML and KLAC both will see meaningful amount of supply in the n-t. Both names will be down 3-4% today and more in the coming weeks.
Friday, August 17, 2012
Dendreon (NASDAQ:DNDN): Like What We’re Hearing, Signs of Revenue Uptick Only Missing Element - Baird
Baird biotech team is out with some pretty interesting comments on Dendreon (NASDAQ:DNDN) after hosting a series of investor meetings with management.
- Firm remains Neutral-rated but suggests some exposure given the name’s negative sentiment and low valuation
Remain Neutral-rated, but incrementally positive on DNDN after hosting management meetings in New York. With shares down >60% since February; Provenge down Q-Q; significant management turnover; and a still-outsized cost structure, the firm understands current investor distaste for DNDN shares. However, they think management articulates a credible turnaround plan both on the revenue and expense lines. While they look for tangible signs of revenue uptick as an upgrade signal, some exposure to this name may be warranted here.
Bucking biotech’s bullish trend. After essentially a year of turmoil, shares are off 37% YTD (NBI up 28%), rendering the stock at just 2X 2012E revenue, as investors increasingly question DNDN’s future solvency, let alone growth potential.
Feeling a lot better about things after travel with management. This week, Baird hosted investor meetings in New York with CFO Greg Schiffman and come away incrementally positive on the stock. Specifically, three key points:
- Near-term Provenge under-performance seems fixable. While Baird surveys have indicated some Zytiga impact, they think Provenge’s June downtick was less related to ASCO’s Zytiga pre-chemo data than with DNDN’s own sales vacancies (~18% of territories end of Q212). Given the high-touch nature of this product they are not surprised vacant territories (-30% Q-Q) would see a drop-off. With the sales force back at full-strength, they do think a near-term rebound will do much to assuage concerns.
- MDVN’s enzalutamide may help, not hurt Provenge. Many have speculated two new therapies (Zytiga now, enzalutamide November 22) will relegate Provenge to niche-status in the chemo-naïve CRPC market. DNDN contends there is significant thought-leader excitement over running a large Provenge/enzalutamide combination trial, given enzalutamide’s better combinability with Provenge (no co-administered steroid) and potential immunotherapeutic synergy (enzalutamide increases T-cell counts).
- Cost efficiency programs. Beyond the already-announced restructuring (bringing COGS to 50%) significant opportunity exists around automation (at the hood and in release testing) which could bring COGS closer to 20-30% - a threshold Baird believes could make DNDN a more attractive take-out candidate.
Not a buy yet, but some exposure warranted. Baird recognizes without a Provenge resurgence, DNDN remains a show-me story. Until such time, they remain on the sidelines, but do nonetheless suggest some exposure given this name’s negative sentiment and low valuation.
Neutral, $8 price target.
Notablecalls: So it appears Baird got the wink from CFO Schiffman. Provenge is likely to surprise to the upside next time the co reports. This should take the stock higher in the meanwhile.
I would not be surprised to see a 10%+ move in DNDN in the n-t.
- Firm remains Neutral-rated but suggests some exposure given the name’s negative sentiment and low valuation
Remain Neutral-rated, but incrementally positive on DNDN after hosting management meetings in New York. With shares down >60% since February; Provenge down Q-Q; significant management turnover; and a still-outsized cost structure, the firm understands current investor distaste for DNDN shares. However, they think management articulates a credible turnaround plan both on the revenue and expense lines. While they look for tangible signs of revenue uptick as an upgrade signal, some exposure to this name may be warranted here.
Bucking biotech’s bullish trend. After essentially a year of turmoil, shares are off 37% YTD (NBI up 28%), rendering the stock at just 2X 2012E revenue, as investors increasingly question DNDN’s future solvency, let alone growth potential.
Feeling a lot better about things after travel with management. This week, Baird hosted investor meetings in New York with CFO Greg Schiffman and come away incrementally positive on the stock. Specifically, three key points:
- Near-term Provenge under-performance seems fixable. While Baird surveys have indicated some Zytiga impact, they think Provenge’s June downtick was less related to ASCO’s Zytiga pre-chemo data than with DNDN’s own sales vacancies (~18% of territories end of Q212). Given the high-touch nature of this product they are not surprised vacant territories (-30% Q-Q) would see a drop-off. With the sales force back at full-strength, they do think a near-term rebound will do much to assuage concerns.
- MDVN’s enzalutamide may help, not hurt Provenge. Many have speculated two new therapies (Zytiga now, enzalutamide November 22) will relegate Provenge to niche-status in the chemo-naïve CRPC market. DNDN contends there is significant thought-leader excitement over running a large Provenge/enzalutamide combination trial, given enzalutamide’s better combinability with Provenge (no co-administered steroid) and potential immunotherapeutic synergy (enzalutamide increases T-cell counts).
- Cost efficiency programs. Beyond the already-announced restructuring (bringing COGS to 50%) significant opportunity exists around automation (at the hood and in release testing) which could bring COGS closer to 20-30% - a threshold Baird believes could make DNDN a more attractive take-out candidate.
Not a buy yet, but some exposure warranted. Baird recognizes without a Provenge resurgence, DNDN remains a show-me story. Until such time, they remain on the sidelines, but do nonetheless suggest some exposure given this name’s negative sentiment and low valuation.
Neutral, $8 price target.
Notablecalls: So it appears Baird got the wink from CFO Schiffman. Provenge is likely to surprise to the upside next time the co reports. This should take the stock higher in the meanwhile.
I would not be surprised to see a 10%+ move in DNDN in the n-t.
Apple (NASDAQ:AAPL): Checks Indicate iPad Mini Has Gone into Production; Raise Target to $900 - Jefferies
Jefferies & Co analyst Peter Misek is out with some very positive comments on Apple (NASDAQ:AAPL) this morning raising his price target to $900 (prev. $800) while reiterating his Conviction Buy List status for the name.
- Checks Indicate iPad Mini Has Gone into Production; So has iTV.
Based on July Taiwan sales data and their checks, Jefferies believes iPad builds for CQ3 have been raised from 18M to 25M and CQ4 from 22-25M to >30M. They continue to think Apple will have ~15M iPhone 5 handsets by mid-Sep and the iTV will launch in CQ4 or CQ1. They remain significantly above St EPS for FY13 ($63 vs. St $52) and think the iPhone 5 will be the biggest handset launch in history. Firm raises their target to $900 and reiterates their Buy rating.
iPad Mini in production. Hon Hai's July revenues were +5% M/M vs. typical seasonality of flat. They believe Hon Hai is the main manufacturer of the iPad Mini. The new build plans of 25M and >30M for CQ3 and CQ4 compare to they current estimates of 16M and 18M, which do not include an iPad Mini.
9/12 event likely an announcement of the iPhone 5, possibly of the iPad Mini, and less likely of the iTV. For the iPhone 5, Jefferies remains confident that by mid-September Apple will have ~15M in finished goods inventory. They believe 3GS, 4 and 4S builds continue into Q4. Pricing for all of those models has been slashed already. Total iPhone builds for H2:CY12 are well in excess of 80M vs. our estimate of 81M. The firm does not know if Apple will have a separate announcement event in Oct for the iPad Mini, and while they also think an iTV will be ready for a CQ4 launch, they do not know how many major product announcements Apple would want to cram into Sep/Oct/Nov and see a CQ1 launch as possible.
Believe the iTV is in full production. Recent data out of Sharp, Hon Hai, and other specialty chemical and TV component suppliers support this. Also, JDSU noted that they have a new non-gaming customer for its gesture control modules. They indicated this is a new "living room" based customer. Jefferies believes Apple will leverage AT&T's and Verizon's content deals for the iTV. Additionally, the WSJ's sources indicate Apple may also consider a set-top box version for the cable operators.
Leave estimates unchanged. Firm currently models 2M iTVs in CQ4 at a $1,250 ASP, which equates to $2.5B in revenues. They think Apple would sell at least 8M iPad Minis at a $300 ASP with a similar GM to the iTV, leading to at least a similar revenue and earnings boost. An iPad Mini launch makes a CQ1 iTV launch more likely, but it could still be in CQ4.
Valuation
Jefferies derives their price target from a 12x multiple ex-cash (14x including) on their FY13 EPS vs. CY13 S&P 500 St P/E of ~12x (premium due to higher growth).
Notablecalls: New highs coming for AAPL today as Jeffco's Misek joins Piper's Munster at $900 price target level. Can't stop this chart. Headed to $640-645/sh today?
- Checks Indicate iPad Mini Has Gone into Production; So has iTV.
Based on July Taiwan sales data and their checks, Jefferies believes iPad builds for CQ3 have been raised from 18M to 25M and CQ4 from 22-25M to >30M. They continue to think Apple will have ~15M iPhone 5 handsets by mid-Sep and the iTV will launch in CQ4 or CQ1. They remain significantly above St EPS for FY13 ($63 vs. St $52) and think the iPhone 5 will be the biggest handset launch in history. Firm raises their target to $900 and reiterates their Buy rating.
iPad Mini in production. Hon Hai's July revenues were +5% M/M vs. typical seasonality of flat. They believe Hon Hai is the main manufacturer of the iPad Mini. The new build plans of 25M and >30M for CQ3 and CQ4 compare to they current estimates of 16M and 18M, which do not include an iPad Mini.
9/12 event likely an announcement of the iPhone 5, possibly of the iPad Mini, and less likely of the iTV. For the iPhone 5, Jefferies remains confident that by mid-September Apple will have ~15M in finished goods inventory. They believe 3GS, 4 and 4S builds continue into Q4. Pricing for all of those models has been slashed already. Total iPhone builds for H2:CY12 are well in excess of 80M vs. our estimate of 81M. The firm does not know if Apple will have a separate announcement event in Oct for the iPad Mini, and while they also think an iTV will be ready for a CQ4 launch, they do not know how many major product announcements Apple would want to cram into Sep/Oct/Nov and see a CQ1 launch as possible.
Believe the iTV is in full production. Recent data out of Sharp, Hon Hai, and other specialty chemical and TV component suppliers support this. Also, JDSU noted that they have a new non-gaming customer for its gesture control modules. They indicated this is a new "living room" based customer. Jefferies believes Apple will leverage AT&T's and Verizon's content deals for the iTV. Additionally, the WSJ's sources indicate Apple may also consider a set-top box version for the cable operators.
Leave estimates unchanged. Firm currently models 2M iTVs in CQ4 at a $1,250 ASP, which equates to $2.5B in revenues. They think Apple would sell at least 8M iPad Minis at a $300 ASP with a similar GM to the iTV, leading to at least a similar revenue and earnings boost. An iPad Mini launch makes a CQ1 iTV launch more likely, but it could still be in CQ4.
Valuation
Jefferies derives their price target from a 12x multiple ex-cash (14x including) on their FY13 EPS vs. CY13 S&P 500 St P/E of ~12x (premium due to higher growth).
Notablecalls: New highs coming for AAPL today as Jeffco's Misek joins Piper's Munster at $900 price target level. Can't stop this chart. Headed to $640-645/sh today?
Tuesday, August 14, 2012
NCR Corp (NYSE:NCR): Downgrading to Neutral from Outperform as Potential FCPA Issues Add Meaningful Risk - Wedbush
Wedbush analyst Gil Luria is downgrading NCR Corp (NYSE:NCR) to Neutral from Outperform this morning while lowering his price target to $23 (prev. $33).
- The move comes after a WSJ report detailing possible FCPA violations (out last night)
Wedbush believes NCR could grow EPS at a 15% CAGR over the next three years if it is able to avoid the impact of potential Foreign Corrupt Practices Act (FCPA) issues. However, pending more visibility into the impact of the issues raised by the Wall Street Journal online, they believe this growth is at risk and are downgrading shares to Neutral from Outperform.
Firm believes immediate implications could be multi-quarter investigation and potential fines with overall price tag in the single millions to tens of millions. They believe that Diebold’s FCPA investigation which has lasted more than two years and has cost several million dollars may end in a significant fine.
If allegations are true and Chinese business is impaired, $200-300 million of revenue in China may be at risk. Luria believes Diebold may have lost as much as $100 million of revenue in Russia alone following its own FCPA investigation.
Possible broader investigation could put overall emerging market growth at risk as well. Wedbush believes much of NCR’s share gains over the last two years have come in emerging markets, which means growth may be at risk if an FCPA investigation restricts current business practices. They point out that NCR grew its ATM business by 15% between 2009 and 2011 while Diebold grew only 3% over the same period. Firm believes that possible new constraints on NCR and Diebold could drive share gains for companies uninhibited by the FCPA such as Chinese based GRG, Korean Hyosung or Japanese ATM makers such as Hitachi.
Reducing price target to $23 from $33 as new risks from a potential FCPA issue reduce visibility into growth. Wedbush' target represents an 11x multiple on 2012 GAAP EPS adjusted for the new pension program and amortization of intangibles of $2.12, a 10% discount to comparable DBD based on the less visibility due to an earlier stage FCPA issues.
Notablecalls: FCPA could be a major overhang, not to mention it remains unclear if the DOJ, SEC or Department of the Treasury currently have investigations under way. Last thing investors want to see is international growth slowing (that's where growth is!).
Another thing to consider is that Mr. Luria is rather well respected in the space. He has been a NCR bull since early 2011 and rightly so. So with him telling clients to sell (with a below market target), the stock will trade down.
Back in 2011 the stock produced a 7-10% move in 2 days on the Luria upgrade.
Also note that Diebold (NYSE:DBD) gapped down 5 pts (-20%) after announcing possible FCPA violations back in 2010. Here's the release.
I'm thinking the stock will hit Luria's $23 price target and move below that in the n-t.
Posting it around open.
- The move comes after a WSJ report detailing possible FCPA violations (out last night)
Wedbush believes NCR could grow EPS at a 15% CAGR over the next three years if it is able to avoid the impact of potential Foreign Corrupt Practices Act (FCPA) issues. However, pending more visibility into the impact of the issues raised by the Wall Street Journal online, they believe this growth is at risk and are downgrading shares to Neutral from Outperform.
Firm believes immediate implications could be multi-quarter investigation and potential fines with overall price tag in the single millions to tens of millions. They believe that Diebold’s FCPA investigation which has lasted more than two years and has cost several million dollars may end in a significant fine.
If allegations are true and Chinese business is impaired, $200-300 million of revenue in China may be at risk. Luria believes Diebold may have lost as much as $100 million of revenue in Russia alone following its own FCPA investigation.
Possible broader investigation could put overall emerging market growth at risk as well. Wedbush believes much of NCR’s share gains over the last two years have come in emerging markets, which means growth may be at risk if an FCPA investigation restricts current business practices. They point out that NCR grew its ATM business by 15% between 2009 and 2011 while Diebold grew only 3% over the same period. Firm believes that possible new constraints on NCR and Diebold could drive share gains for companies uninhibited by the FCPA such as Chinese based GRG, Korean Hyosung or Japanese ATM makers such as Hitachi.
Reducing price target to $23 from $33 as new risks from a potential FCPA issue reduce visibility into growth. Wedbush' target represents an 11x multiple on 2012 GAAP EPS adjusted for the new pension program and amortization of intangibles of $2.12, a 10% discount to comparable DBD based on the less visibility due to an earlier stage FCPA issues.
Notablecalls: FCPA could be a major overhang, not to mention it remains unclear if the DOJ, SEC or Department of the Treasury currently have investigations under way. Last thing investors want to see is international growth slowing (that's where growth is!).
Another thing to consider is that Mr. Luria is rather well respected in the space. He has been a NCR bull since early 2011 and rightly so. So with him telling clients to sell (with a below market target), the stock will trade down.
Back in 2011 the stock produced a 7-10% move in 2 days on the Luria upgrade.
Also note that Diebold (NYSE:DBD) gapped down 5 pts (-20%) after announcing possible FCPA violations back in 2010. Here's the release.
I'm thinking the stock will hit Luria's $23 price target and move below that in the n-t.
Posting it around open.
Thursday, August 09, 2012
Cisco Systems (NASDAQ:CSCO): Upgraded at Piper and Goldman; Checks reveal surprising strength
Cisco Systems (NASDAQ:CSCO) is getting some analyst love this morning as both Piper Jaffray and Goldman Sachs are upgrading the stock.
- Interestingly, both firms say their checks revealed better than expected enterprise demand
*Piper Jaffray is upgrading CSCO to Overweight from Neutral with a $22 price target (prev. $20) saying they believe Cisco will report respectable FQ4 results with revenues inline with consensus, but better margins and cost controls providing upside to EPS.
Their confidence is based on proprietary channel checks and data points from distributors, coupled with Cisco’s recent improved execution. Firm expects Cisco will provide some cautious commentary regarding macro headwinds in Europe and the Fed vertical, but believe these concerns are already factored into expectations and the current stock valuation. They believe CSCO’s stock will work higher with investor interest in networking stocks returning and estimates likely moving higher (accretive acquisition and cost controls). Piper also also believes CSCO’s stock offers downside protection if markets turn negative with an attractive valuation (5.5x CY13 EPS ex-cash) and nearly 2% dividend yield.
Favorable Channel Checks – Based on proprietary channel checks, data points from distributors and their recent VARs survey, Piper believes Cisco will meet or slightly beat revenue expectations and tight cost controls should drive better than expected EPS results. They anticipate Enterprise sales were above plan, with the sluggish sales from service providers preventing limiting upside in the quarter.
2H Carrier Expectations - Piper believes 2H spending from North American service providers will increase over the 1H. While the rate of growth is likely below historical trends, they believe this will aid Cisco's ability to exceed the 2H estimates that are currently reflecting below historical seasonality.
Firm believes CSCO shares will trade higher throughout the remainder of CY12 given improving investor sentiment and upward EPS revisions.
*Goldman Sachs is adding CSCO to their Conviction Buy Listi with a $24 price target representing 40% return potential. According to the firm they believe believe its fundamentals are inflecting positively, with both their recent IT Survey and their just-published channel survey pointing to stronger than expected growth in enterprise networking, and switching in particular, as well as to a stronger competitive position for Cisco.
Moreover, North America capex appears set for above-seasonal growth in 2H 2012. Separately, they think longer-term concerns such as software-defined networking (SDN) are overdone, with Cisco’s 1.3X EV/S implying the market is pricing in rapid margin degradation from the current 28%, which they view as unlikely.
Catalyst
Goldman expects Street estimates for Cisco to move up post F4Q (Jul) earnings next week, and their next two quarters’ EPS estimates are 6-7% above consensus on stronger growth in switching (due to the 10 Gb upgrade cycle) and routing (100 Gb upgrade cycle in core, share gains in edge), cost controls, and accretion from NDS (GSe $0.05 in FY13), which the Street
hasn’t yet modeled. They also think Cisco can gain share in service provider video (8% of sales) given Google’s reported plans to sell Motorola Mobility’s set-top box business. Further out, Goldman expects Cisco’s analyst day in September and upcoming investor conferences to clarify its SDN strategy and alleviate investor fears of imminent and significant margin declines, which they expect will lift its multiple to low double digits, consistent with their 8.5% EPS CAGR expectation for CY2011-14.
Enterprise spending on network equipment is on more solid footing than feared
While there is still a high level of consternation among investors on end demand trends in the networking segment, recent datapoints suggest that demand is better than expected. Goldman's June IT survey, which polls 100 IT executives from Global 2000 companies, showed that 53% of respondents expect to increase their spending with Cisco over the next 12 months. Importantly, this represents the highest level since 2H 2008, putting this data series back into the 50-70% range that they have historically considered “healthy” for Cisco. Meanwhile, the percentage of respondents expecting spend to be flat or down declined meaningfully since the firm last asked that question in September 2011. For context, enterprise spending (not including SMB) drives about a third of Cisco’s bookings.
Similarly, Goldman's just published VAR survey points to stronger than expected growth for network infrastructure in 2012 and for Ethernet switching in particular. Recall that VARs are particularly important for Cisco, given that about 80% of its revenues come from the channel.
Notablecalls: This could be something - two separate firms out with positive channel checks. Goldman is actually making a positive sector call with a survey report titled "Channel survey shows surprising strength; Buy CSCO and ARUN".
Definitely out-of-consensus stuff.
I expect CSCO to see meaningful buy interest in the n-t. The stock could trade close to $18 today if the tape cooperates.
- Interestingly, both firms say their checks revealed better than expected enterprise demand
*Piper Jaffray is upgrading CSCO to Overweight from Neutral with a $22 price target (prev. $20) saying they believe Cisco will report respectable FQ4 results with revenues inline with consensus, but better margins and cost controls providing upside to EPS.
Their confidence is based on proprietary channel checks and data points from distributors, coupled with Cisco’s recent improved execution. Firm expects Cisco will provide some cautious commentary regarding macro headwinds in Europe and the Fed vertical, but believe these concerns are already factored into expectations and the current stock valuation. They believe CSCO’s stock will work higher with investor interest in networking stocks returning and estimates likely moving higher (accretive acquisition and cost controls). Piper also also believes CSCO’s stock offers downside protection if markets turn negative with an attractive valuation (5.5x CY13 EPS ex-cash) and nearly 2% dividend yield.
Favorable Channel Checks – Based on proprietary channel checks, data points from distributors and their recent VARs survey, Piper believes Cisco will meet or slightly beat revenue expectations and tight cost controls should drive better than expected EPS results. They anticipate Enterprise sales were above plan, with the sluggish sales from service providers preventing limiting upside in the quarter.
2H Carrier Expectations - Piper believes 2H spending from North American service providers will increase over the 1H. While the rate of growth is likely below historical trends, they believe this will aid Cisco's ability to exceed the 2H estimates that are currently reflecting below historical seasonality.
Firm believes CSCO shares will trade higher throughout the remainder of CY12 given improving investor sentiment and upward EPS revisions.
*Goldman Sachs is adding CSCO to their Conviction Buy Listi with a $24 price target representing 40% return potential. According to the firm they believe believe its fundamentals are inflecting positively, with both their recent IT Survey and their just-published channel survey pointing to stronger than expected growth in enterprise networking, and switching in particular, as well as to a stronger competitive position for Cisco.
Moreover, North America capex appears set for above-seasonal growth in 2H 2012. Separately, they think longer-term concerns such as software-defined networking (SDN) are overdone, with Cisco’s 1.3X EV/S implying the market is pricing in rapid margin degradation from the current 28%, which they view as unlikely.
Catalyst
Goldman expects Street estimates for Cisco to move up post F4Q (Jul) earnings next week, and their next two quarters’ EPS estimates are 6-7% above consensus on stronger growth in switching (due to the 10 Gb upgrade cycle) and routing (100 Gb upgrade cycle in core, share gains in edge), cost controls, and accretion from NDS (GSe $0.05 in FY13), which the Street
hasn’t yet modeled. They also think Cisco can gain share in service provider video (8% of sales) given Google’s reported plans to sell Motorola Mobility’s set-top box business. Further out, Goldman expects Cisco’s analyst day in September and upcoming investor conferences to clarify its SDN strategy and alleviate investor fears of imminent and significant margin declines, which they expect will lift its multiple to low double digits, consistent with their 8.5% EPS CAGR expectation for CY2011-14.
Enterprise spending on network equipment is on more solid footing than feared
While there is still a high level of consternation among investors on end demand trends in the networking segment, recent datapoints suggest that demand is better than expected. Goldman's June IT survey, which polls 100 IT executives from Global 2000 companies, showed that 53% of respondents expect to increase their spending with Cisco over the next 12 months. Importantly, this represents the highest level since 2H 2008, putting this data series back into the 50-70% range that they have historically considered “healthy” for Cisco. Meanwhile, the percentage of respondents expecting spend to be flat or down declined meaningfully since the firm last asked that question in September 2011. For context, enterprise spending (not including SMB) drives about a third of Cisco’s bookings.
Similarly, Goldman's just published VAR survey points to stronger than expected growth for network infrastructure in 2012 and for Ethernet switching in particular. Recall that VARs are particularly important for Cisco, given that about 80% of its revenues come from the channel.
Notablecalls: This could be something - two separate firms out with positive channel checks. Goldman is actually making a positive sector call with a survey report titled "Channel survey shows surprising strength; Buy CSCO and ARUN".
Definitely out-of-consensus stuff.
I expect CSCO to see meaningful buy interest in the n-t. The stock could trade close to $18 today if the tape cooperates.
Wednesday, August 08, 2012
CF Industries (NYSE:CF): CF Industries: 2012 Is Not the Peak; Stock worth $305/share - Don Carson
Susquehanna uber-analyst Don Carson is making a big call on CF Industries (NYSE:CF) raising his price target to a Street high of $305 (prev. $240).
- His new price target represents ~48% upside from current levels.
Susquehanna is raising their 2012/13 EPS to $27.70/$28.00 from $26.70/$21.25 and their 12-month price target to $305 from $240. They now see 2013 EPS above 2012 driven by an improved nitrogen pricing outlook in 2013 due to elevated grain prices leading to increased acreage planted and N demand, a minimum of $2.00 in EPS accretion from the acquisition of the minority stake in the cost-advantaged Medicine Hat, Alberta N plant, and the benefits of a lower share count due to share repurchase. Firm notes they had lowered their target multiple on Nitrogen segment EBITDA to 5.0x from 6.0x following the lack of share repurchases in Q1, but are reverting back to the 6.0x multiple used for other N producers in firm's coverage universe which accounts for $47 of the $65/share price target increase.
* Also note that Morgan Stanley is raising their price target to $250 (prev. $215) noting they expect consistent, measured, share repurchases, absent market dynamics that would encourage more aggressive action. Over time, they expect the consistency of this process to be viewed similar to a dividend, likely leading to a narrowing of CF’s significant valuation gap with nitrogen MLPs.
Investment Case
While some investors are questioning what’s next for CF now that the capital allocation debate has come to a very positive conclusion, Morgan Stanley challenges investors to find a more attractive equity investment. CF Industries:
1. Has a sustainable feedstock cost advantage and is positioned in the highest nitrogen price end market in the world;
2. Unequivocally benefits from recent trends in US agriculture. The US farmer will likely plant as much if not more corn in 2013 as in 2012 and he will buy nitrogen, no ifs ands or buts;
3. Has almost zero exposure to Europe from a sales perspective and developments in Greece, Spain et al will not change corn or nitrogen supply / demand dynamics;
4. Is in the process of a substantial recapitalization through share repurchases that minimizes the risk of share price downside;
5. Will grow through highly accretive low risk tack on M&A and low risk / high reward brownfield projects offsetting risk of the nitrogen cycle “peaking” and making an ultimate “soft landing” that much more likely; and
6. Trades at a very undemanding ~4-times EBITDA.
MSCO's Bull Case target moves to $300.
Notablecalls: Don Carson is the Axe in the space. Back in the day he was voted Institutional Investor's #1 analyst in his space for 6 consecutive years. People still very much listen to what he has to say.
With Carson out with a new Street high target the stock is off to the races, I believe. Just take a look at the chart - it's so close to a breakout.
The comments from MSCO are also very encouraging.
I'm thinking $210+ today. Possibly much higher in the coming weeks.
Posting it around market open.
- His new price target represents ~48% upside from current levels.
Susquehanna is raising their 2012/13 EPS to $27.70/$28.00 from $26.70/$21.25 and their 12-month price target to $305 from $240. They now see 2013 EPS above 2012 driven by an improved nitrogen pricing outlook in 2013 due to elevated grain prices leading to increased acreage planted and N demand, a minimum of $2.00 in EPS accretion from the acquisition of the minority stake in the cost-advantaged Medicine Hat, Alberta N plant, and the benefits of a lower share count due to share repurchase. Firm notes they had lowered their target multiple on Nitrogen segment EBITDA to 5.0x from 6.0x following the lack of share repurchases in Q1, but are reverting back to the 6.0x multiple used for other N producers in firm's coverage universe which accounts for $47 of the $65/share price target increase.
* Also note that Morgan Stanley is raising their price target to $250 (prev. $215) noting they expect consistent, measured, share repurchases, absent market dynamics that would encourage more aggressive action. Over time, they expect the consistency of this process to be viewed similar to a dividend, likely leading to a narrowing of CF’s significant valuation gap with nitrogen MLPs.
Investment Case
While some investors are questioning what’s next for CF now that the capital allocation debate has come to a very positive conclusion, Morgan Stanley challenges investors to find a more attractive equity investment. CF Industries:
1. Has a sustainable feedstock cost advantage and is positioned in the highest nitrogen price end market in the world;
2. Unequivocally benefits from recent trends in US agriculture. The US farmer will likely plant as much if not more corn in 2013 as in 2012 and he will buy nitrogen, no ifs ands or buts;
3. Has almost zero exposure to Europe from a sales perspective and developments in Greece, Spain et al will not change corn or nitrogen supply / demand dynamics;
4. Is in the process of a substantial recapitalization through share repurchases that minimizes the risk of share price downside;
5. Will grow through highly accretive low risk tack on M&A and low risk / high reward brownfield projects offsetting risk of the nitrogen cycle “peaking” and making an ultimate “soft landing” that much more likely; and
6. Trades at a very undemanding ~4-times EBITDA.
MSCO's Bull Case target moves to $300.
Notablecalls: Don Carson is the Axe in the space. Back in the day he was voted Institutional Investor's #1 analyst in his space for 6 consecutive years. People still very much listen to what he has to say.
With Carson out with a new Street high target the stock is off to the races, I believe. Just take a look at the chart - it's so close to a breakout.
The comments from MSCO are also very encouraging.
I'm thinking $210+ today. Possibly much higher in the coming weeks.
Posting it around market open.
Wednesday, July 18, 2012
Tesla Motors (NASDAQ:TSLA): Downgrade to Sell On Likely Reduced 3Q Production - Wunderlich
- The downgrade comes after reports of production cuts
Wunderlich is lowering their estimates, rating, and target for Tesla (TSLA) on likely 3Q12 production cuts for sales of the Model S. The shares, which recently reached $36, have fallen on both profit taking and the growing realization that 3Q12 estimates are at risk, with production likely coming in at the low end of the range. While the company is sticking to its 5,000 unit forecast for 2012, how it gets there becomes a second issue for it to resolve. While Wunderlich believes that TSLA is doing everything right from a business perspective and has demonstrated superiority of design, they believe the market may pause to see how it handles the execution, allowing the shares to retrace the year's gains.
Production cut to 500 units in 3Q12 and some pushouts. While initially saying that it would produce and sell 1,000 cars in 3Q12, TSLA now says it will certainly be 500 cars. All the Street estimates assume 1,000 cars and so there will be inevitable cuts to estimates. Firm notes they also heard that there are some pushouts of deliveries and this would be consistent with production headed for the lower estimate, but they have not been able to verify this first hand.
Why the production cuts? Tesla wants to be sure the cars are right and apparently they are not in a position to ramp to get to 1,000 units this quarter. From Wunderlich's own due diligence, they don't believe there is any shortage of components, so it could be as "simple" as just getting the hang of lining up all the body panels, which is part art. Could it be something more serious? If it were more serious, they believe sales would have been delayed - but who knows?
Raises issues for 4Q12. Tesla is still sticking to its 5,000 unit full-year production forecast and this would imply 4,500 units in 4Q12, up from 4,000. How it gets to this higher volume when it is having issues now makes it a bit of a wait-and-see story and, in this market, there isn't much patience for waiting! So while they believe Tesla has all the design and most of the execution right, they need to see how the execution issue is resolved.
Notablecalls: TSLA is having production issues, it appears. This is going to hurt the stock. Maybe as bad as -10% today.
Monday, July 16, 2012
Mead Johnson (NYSE:MJN): "Fear Of The Dragon" - Downgrading To Sector Perform - RBC
- RBC thinks MJN could miss Q2 sales estimate by about 5% and report a negative volume number.
According to the analyst, Ed Aaron the MJN story has become highly controversial in recent weeks as investors have begun to question the growth prospects for China, which in 2011 accounted for 29% of sales and about two-thirds of the company’s 17% sales growth. While Mead’s messaging on China has been incrementally more cautious for the past couple of quarters, investors’ interpretation of this message has changed in recent weeks, reflecting: 1) Mead’s presentation and discussion of China category growth and market share data at a competitor conference last month; 2) syndicated data showing decelerating growth; and 3) myriad data points indicating a broad-based slowdown in China consumer spending growth. Examples include McDonald’s, Nike, Coach, and Tiffany, to name a few.
Accurately assessing the rate of deceleration is exceedingly difficult coming off a period of such extraordinary growth. Last year, China/HK grew 45% and accounted for two-thirds of Mead's 17% sales growth. China/HK sales have more than doubled in the last three years.
Assessing the impact of slower near-term China growth on the Mead investment thesis requires an understanding of not only how much growth has slowed, but also why. If the slowdown is mostly a function of unusually tough comps and near-term distortion resulting from the double-digit price increase that went into effect in April, it would be viewed as more transitory in nature. To the extent that the slowdown reflects either growing macro weakness or changing competitive dynamics, it would present a bigger challenge to the investment thesis. RBC believes each of these factors is having an impact to some extent. They are inclined to believe that the more transitory factors are the most significant, but it’s difficult to assess the exact magnitude of each.
See risk to sales expectations. The firm thinks Mead could miss Q2 sales estimates by about 5% and potentially report a negative volume number for the quarter. While they still think full-year guidance is achievable, they are no longer convinced that guidance has upside.
Lowering estimates to incorporate slower China growth. RBC lowered their FY-12 and FY-13 estimates by $0.10 and $0.20 respectively, which takes them from above consensus to below consensus. Their China/HK organic growth assumptions include: +12% for 2Q12, +16% for FY-12, and +15% for FY-13.
Notablecalls: This is a potentially significant call that could send MJN stock down several points today and in the coming days.
Here's why:
- MJN is all about Asia and things appear to be cooling there.
- The stock trades at a +20x fwd P/E, which of course means it's expensive and needs to produce significant growth to justify the valuation.
- RBC is calling for a Q2 EPS miss. Again, I point out the +20x fwd P/E. If RBC is right and MJN produces a below-consensus # in 10 days the stock is going to be 10-15 pts lower (MJN is scheduled to report on Jul 26).
- MJN has been such an analyst darling (note RBC has been OP rated for ages) and once the tide turns it's going to hurt. The stock feels broken here.
I'm thinking to the tune of 2-3pts of downside today and possibly more toward low $70's ahead of Jul 26.
PS: I'm posting this after open. Use possible bounces to scale in.
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