Monday, August 31, 2009
Firm believes valuation has fallen below their industry growth framework, and earnings expectations, for a long time aggressive, are now beatable, in their view. Also, they see a powerful cash flow story emerging as GME nears paying off its remaining debt and could turn to buying back shares. Lastly, they see secular concerns around the business as overblown; digital downloading is not an existential threat as current console games are too big to download, and the Used business has significant barriers to entry; GME should continue to dominate that market. Goldman's $28 price target suggests 19% upside.
After two quarters of downward earnings revisions Goldman now has forecasts above the Street. Beginning with 3Q09, where they are 3c above consensus, they expect the company to begin reporting favorable numbers against a lowered bar. As the company meets or exceeds earnings expectations, they believe valuation levels will rebound to closer to levels suggested by our industry growth framework. The combination of a healthier release slate and easing compares should drive accelerating industry growth going forward, which should become evident through monthly NPD trends.
They are raising estimates on continued strength in new store productivity and the recapture of Used margins in 2010. 2009 estimate increases to $2.57, from $2.52; 2010 rises to $2.91, from $2.68; and, 2011 rises to $2.82, from $2.55.
- After two quarters of sharp downward revisions to guidance, Goldman finally sees earnings estimates as achievable, and even beatable. Going back to the beginning of the year, Goldman's forecasts had stood at more than 30c below consensus, as shown in Exhibit 1, whereas today, their forecasts are actually modestly above consensus. Firm believes the company has lowered the bar tremendously, issuing more than achievable back-half guidance, particularly in 3Q where they stand 1c above the high-end of guidance and 3c above consensus.
- Another positive they see in GME stock is an emerging cash flow story, which beginning as soon as next year could be deployed towards share repurchases, driving significant upside to earnings. With minimal capex requirements, even with its current pace of store growth, and efficient working capital on little net inventory commitment, GME is a strong generator of cash, expected to produce $450 mn of free cash this year. For the past several years, GME has used its free cash to pay down the $940 mn of debt it issued to purchase Electronics Boutique in 2005 and the $236 mn it issued to buy Micromania in late 2008. As of the end of 2Q09, it has less than $500 mn of that total debt remaining. With an expected cash balance at the end of this year of nearly $1 bn and annual free cash flow in the range of $500 mn, the company will be building a sizable amount of excess cash. Deploying it towards share repurchases would drive significant upside to Goldman's earnings estimates. Annual share repurchases of $500 mn, roughly in-line with free cash flow, would drive 16% upside to 2011 earnings, even assuming repurchase prices in-line with firm's price target for the stock.
Notablecalls: I like this call. The target could have been somewhat higher given the fact GME is the cheapest name in the space but note how Goldman hints there could be upside from share repurchases.
The short interest stands at 10%+ and with a GSCO upgrade at least some of these guys (and gals) are going to run for cover.
I see this one going to $24.50 and $25 if the market behaves (big IF).
- Baird is downgrading GENZ to Neutral from Outperform while lowering their target to $58 (prev. $64). Firm is lowering theior Cerezyme estimates considerably through 2012 as they now feel the odds of continued delays at Allston Landing and longer-lasting fallout from said delays are now higher. While continued snags with FDA’s review of Allston are one thing, now that EMEA has found issues at the plant, they are increasingly wary of further delay at this critical competitive juncture.
EMEA’s turn. GENZ indicated Friday that EMEA inspected Allston (August 17-21), finding one “major observation” and several other observations. GENZ will respond within 15-days.
- Very surprising Allston still has deficiencies. While they have urged patience until now, the firm is surprised that there are still significant deficiencies at Allston this late in the game.
- Can no longer blame an overzealous FDA. Until now they have perceived European regulators as more accommodating (e.g., approval of the Myozyme 2000L process). EMEA statistics show historically only ~10% of EMEA observations are categorized as “major.”
- Timing could not be worse. With Shire gearing up to supply velaglucerase through a treatment IND, Baird thinks effects could be more enduring than anticipated. They are lowering Cerezyme estimates to $985M, $1,096M, and $1,098M for 2010-2012 respectively.
- Could things get worse? Indeed they could. GENZ’s recent 10-Q disclosed FDA could withdraw market exclusivity for both Fabrazyme and Myozyme under Orphan Drug. While Shire’s desire to enter the US with Replagal is well known, they remind investors that under such a scenario, BMRN’s BMN-103 could begin trials with no requirement for superiority over Myozyme.
- Still reason for hope. Still undisclosed velaglucerase/Cerezyme head-to-head and switching trials could show numerical inferiority to Cerezyme, which they think would be a significant positive for GENZ shares. However, with little indication such a scenario is likely, and no visibility into likelihood of further Allston delays, they see a better entry point in the high $40s.
- Goldman Sachs believes the news could pressure Genzyme shares because resumption of product supply might be delayed. The Allston facility is the single supply source for Cerezyme (25% of revenues) and Fabrazyme (10% of revenues).
1) Resumption of Cerezyme supply may be delayed. Genzyme expects shipments of new Cerezyme product from the Allston plant to resume in November or December 2009 after FDA re-inspection of the facility in the coming weeks/months and resolution of the issues in the FDA Warning Letter. If the EMEA deficiencies relate to items in the FDA Warning Letter, Genzyme might need additional remediation steps prior to the FDA re-inspection. If the EMEA deficiencies are unrelated, the FDA might require that these deficiencies be corrected before shipments resume. Outside the United States, there could be risk that the EMEA might restrict shipments if the deficiencies are not resolved on schedule.
2) Could lead to more severe Cerezyme shortages. Although the FDA has cleared two lots of the old finished Cerezyme for use in the United States, Goldman believes the EMEA has not yet approved these lots. It is difficult to assess the impact the news has on the status of these lots without details of the EMEA deficiencies. However, with 2/3 of Cerezyme sales outside the United States, delay is approval by EMEA could create local shortages and additional share loss to competing products by Shire and Protalix.
Notablecalls: Well, as Leerink noted in their upgrade a week ago any delays with the Allston manufacturing facility will likely send the shares down to low-$50's.
That's where GENZ is headed today. I'm guessing $53 or lower.
Note that the delay is NOT yet confirmed. That should keep the downside more moderate.
Monday, August 24, 2009
They are upgrading Ashland (NYSE:ASH) to Buy from Hold and are establishing a $53 price target given improved confidence that Valvoline can keep rolling on higher profitability, cost savings initiatives are ahead of schedule and the Hercules franchises have good room for earnings growth. While the stock has had a strong run since March 2009, they believe it is still attractive trading at an estimated FY10 EV/EBITDA multiple of 4.5x. Firm's price target is based on an estimated FY10 EV/EBITDA multiple of 6.0x.
- 2010 EPS Estimate Increased: Keybanc is raising their FY10 EPS estimate by $0.85 to $3.25 vs. their estimate of $3.00 for FY09. The year-over-year improvement looks for very modest volume growth, improved costs and flattish earnings for Valvoline.
- Valvoline – Sustainable: The majority of the earnings increase noted above comes from increased confidence that the improved profitability throughout the motor oil chain is here to stay. Firm notes they have seen similar highly consolidated industry structure maintain profitability via more rational pricing over the last few years. Valvoline represents around 50% of Keybanc's earnings forecast for 2010. They believe gross margins can be sustained at the low 30% level vs. the low 20% level.
- Functional Ingredients (Aqualon): Keybanc sees 15% growth in operating income in FY10 vs. FY09, primarily due to cost savings and new products wins. With a good recovery in demand, they should see operating margins returning to the mid-teens range vs. an estimated 9% in FY09. They have seen strong margin expansion also from the additives players such as The Lubrizol Corporation (LZ-NYSE) and NewMarket Corporation (NEU-NYSE)
- Water Technologies – On Stable Ground: They believe ASH now has the right platform to compete in the water treatment market. Firm sees the potential for operating margins to improve to mid single digits in FY10 and high single digits longer term as its growth initiatives take hold.
- Attractive Earnings Potential: Given improved demand longer term, ASH is highly leveraged to an economic recovery where they see normalized EPS around the $4.00 level.
- Room for Multiple Expansion: Despite a strong run in the stock, ASH continues to trade at a good discount to the specialty chemical sector. Given the potential for sustained profitability in Valvoline over the next two quarters and improved profitability in Hercules, the firm believes a higher multiple is warranted
Notablecalls: As many of you have noticed, I'm quite a fan of Keybanc's Specialty Chemicals team. The call, while admittedly late is still a good one and will generate buy interest.
- The whopping $53 price target offers close to 70% upside.
- The chart looks like it wants to run several more points before stopping for a breather.
- ASH has always been rumored to be a t/o candidate
All in all, I think this one has potential to be a $38+ stock today.
Firm notes they are upgrading AMD, given what they believe is a favorable risk/reward profile. They are raising our price target based on a sum of the parts of Global Foundries ($0.45) and Product Co ($5.08). Firm' estimates are tweaked given their more rigorous model for Global Foundries.
Deep Discount to the Sector — 3Q09 QTD, AMD shares are down 4.4%, underperforming the broader chip industry (SOXX up 14.5%, S&P up 11.6%). Citi recognizes that AMD’s competitive position is poor and its net debt position classifies the company as “low quality.” However, now trading at just 1.25x EV/sales, a 45% discount to the group (2.3x), they see risk/reward as favorable.
Elements of Stabilization Evident — 3 fundamental factors are contemplated in their upgrade: 1) AMD’s competitive position with its major customer is likely bottoming, supported by recent platform wins; 2) AMD’s gross margin is expected to rise off bottom quintile 2Q09 levels, correlating well with share price; 3) 2010 consensus estimates are likely conservative, noting that AMD tends to outperform the current consensus growth rate 75% of the time in periods of improving PC growth.
Not Without Risks — 1) 2H09 back-to-school selling season could be a disappointment, impacting the entire sector; 2) AMD is highly likely to refinance its 2012 debt—while not expected to be via equity, dilution is a possibility; 3) OEM’s are increasingly looking to non x86 providers of CPU’s (notably Qualcomm), creating a potential long-term threat to AMD.
Confident in Improving Gross Margin. Firm is increasingly confident in gross margin improvement for AMD—noting that 2Q09 GM was in the bottom quintile of AMD’s historical margin performance. As they chart below, such improvement correlates positively with share price improvement:
Citigroup's confidence is derived from:
1. In 1H09, Global Foundries gross margin averaged ~15%, hampered by sub-50% utilization rates as sales fell 18% 1H09/1H08;. However, AMD’s clearance of 65nm inventory in 2Q09, ahead of seasonal growth in 2H09, has paved the way to increased utilization. Firm has confirmed that production levels are increasing, benefited by lower cost 45nm production. They note that as sales increase 9% 2H09/1H09, we expect corporate gross margin to increase from 29.0% in 2Q to 38.6% in 3Q on higher utilization.
2. On its recent earnings call, HP commented that as AMD-based servers from 3-4 years ago are coming up for refresh, HP expects its recent share gain to slow. While this reflects poorly on AMD’s roadmap, headlined by its recently introduced Istanbul processor, Citigroup nonetheless assertsd that AMD’s server sales have bottomed.
3. They expect new consumer products to positively contribute to AMD’s gross margin. In particular, AMD’s Congo andRV870 graphics platform are accretive margins.
Notablecalls: In the end even the dogs get upgraded.
AMD is bound to trade up towards $3.90-$3.95 range (gut feel) today on this call. It is likely to pull back from there but I will not be a buyer. There is too much liquidity around in AMD, making bounces tough to play.
If the tape remains strong I would not be surprised to see AMD trade towards $4.25+ but that's more of a market call.
All in all, not my cup of tea. But it's out there.
Friday, August 21, 2009
They are upgrading Genzyme (NASDAQ:GENZ) to Outperform from Market Perform based on: 1) MEDACorp consultants' ("consultants") perspective that Vesivirus is unlikely to recur in Allston; and 2) while Gaucher's experts note an eagerness to switch a majority of their patients to Shire's velaglucerase and a reluctance to switch to PLX's prGCD given immunogenicity concerns, the firm does not believe competitors have sufficient capacity at the current time to absorb more than 20% of the population.
Leerink believes Street concerns on the Allston manufacturing facility have overshot the mark. Based on: 1) consultants’ feedback that the probability of Vesivirus recurrence is <10%; style="font-weight: bold; color: rgb(51, 204, 0);">They expect shares to react favorably to the updates and see recovery to the high $50s, yielding comparable upside to that which they see for other largecap biotech names.
Despite The Bad Luck, GENZ Couldn't Have Been Luckier. While the timing of the Vesivirus infection relative to dwindling inventory levels was self-inflicted bad luck, the fact that Shire's Lexington facility will not come on line until until 2012 and the fact that PLX has its own supply limitations and is yet to present compelling safety/efficacy data to practitioners means that Cerezyme is likely to escape with a flesh wound instead of the decapitation that would have happened if competitors were geared up to claim market share.
Don't Forget The 2010 Catch-up Effect. In 2010, GENZ expects to sell all the Cerezyme it can produce, in part to replenish inventory, which should boost 2010 revenues.
Still Upside Despite Significant Share Loss. Leerink's 2015 Cerezyme estimate of $1B on the backdrop of a $1.2B 2008 market growing at $100M/yr represents share loss of ~40%. We believe current valuation assumes 2015 share loss of ~65%.
Could Lumizyme Approval Come Early? The gating factor on Lumizyme 2KL approval is FDA re-inspection, which, could occur at any time, in Leerink's view. They do not see downside to speculating the approval could come before the mid-November PDUFA.
4KL Should Be Fine. The FDA will use the same ICH guidelines that the EMEA used to get comfort that the 4KL facility is comparable to the 2KL. Firm estimates FDA approval represents a boost of ~$100M/yr in Lumizyme revenue (~270 patients).
Notablecalls: I like this call:
- Leerink Swann is pretty much the best Biotech/Pharma house out there. See how they upgraded Shire Plc (NASDAQ:SHPGY) on July 17 - the stock is up 10 pts since then. Note that Shire's velaglucerase is Cerezyme's main competitor.
- They don't even mention valuation as ONE of the reasons for the upgrade.
- Catalysts ahead (Lumizyme, updates on Cerezyme)
- Estimates are raised even for the outer-years.
- The shorts were in trouble already yesterday. Today's upgrade will add insult to injury. Goldman and several other firms have been touting GENZ as a possible short candidate and will likely have to start rethinking their thesis as catalysts start nearing.
All in all, I see GENZ trading to $54 today and possibly to $54.50 if the shorts step in and start covering.
Thursday, August 20, 2009
Among them Rentech (AMEX:RTK) the maker of ultra-clean transportation fuels. The stock produced a big move on Tusday August 18.
- Around 1:03 PM ET Tuesday afternoon a senior member of NCN pinged me with the following:
RTK +++ MAJOR POSITIVE - Rentech (RTK) CEO Hunt Ramsbottom will be appearing on The Kudlow Report tonight to discuss how synthetic engines will be revolutionary to the aviation industry and also discussing its contract signing of an unprecedented multi-year agreement to supply eight airlines last time he was on..the day of his appearance the stock rose from $1.87 to $2.75.
Knowing RTK was a stock very prone to move on a CNBC mention, I didn't hesitate to distribute the call to other NCN members.
It didn't take long for the trading masses to catch on and push the stock higher...way higher.
Depending on one's entry and exit 40-60% gains were to be had over the next hours and the next morning.
This is how Notable Calls Network (NCN) works - sharing the flow. We catch them every day.
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Firm notes they believe the long-term story remains attractive, and the near-term outlook is showing notable signs of improvement. While the market is currently discounting both a potential housing bottom and further significant erosion in nonres construction, they believe the outlook for both markets will improve over the next year or so. Concerns remain, to be sure, as evidenced by the depressed stock price, but the firm expects fundamentals to start to improve going forward, pushing EPS and the stock price considerably higher. Simply put, they’ve seen enough stabilization to rule out a dire scenario, and believe they’ll miss it if we wait for confirmation of a housing and nonres rebound.
Solid long-term story. BB&T believes the long-term outlook remains bright, based in large part on 1) huge water infrastructure demand estimated at $335B over 20 years, and 2) MWA’s leading positions in oligopoly markets with solid barriers to entry. Importantly, the specification process, large initial investment requirements, and exclusive distributor relationships provide solid barriers to entry, so the firm sees little risk of new competition. Furthermore, MWA is typically #1 or #2 in its key markets, often with 25%–50% market share, and its competitors (mostly private and active in the space for decades) generally do not use price as a weapon to take share.
EPS power. MWA sees 20% EBITDA margins under more normal conditions, which won’t likely be “normal” until 2012, when housing and nonres should be much more robust. Firm estimates that MWA could generate EPS power of close to $1.00 assuming a 20% EBITDA margin, or $0.65 using a more conservative 17% margin. They typically wouldn’t discount potential EPS power that far out, but they see value in a $3.73 stock with the potential for $1.00 in earnings.
Compelling risk-reward. BB&T notes their timing may not be ideal, but the stock remains depressed on numerous concerns, yet trends are starting to improve. They see a compelling risk reward scenario with downside risk to the $3.00 range (down 20%, close to book value), but considerably more upside potential as housing rebounds in 2010, nonres bottoms in 2011, covenant issues are avoided, and investors discount much more robust earnings power. MWA trades at 13.6x and 8.7x firm's new FY’09–FY’10E EV/EBITDA. They are initiating a price target of $6.00, implying more than 60% upside potential, based on 10.5x FY’10E EV/EBITDA.
Notablecalls: I suspect they will drive this one nuts. The mention of $1 in potential EPS power makes sure of that. After all, MWA is a $3-4 stock. A Water play, I might add! These covenant plays (AXL, DAN etc) have been red hot lately. MWA is one. They tripped earlier this yr but things are beginning to look up as per BB&T.
I think this one can trade over $4 today and closer to $4.25 if the mo-mo crowd picks it up.
- Credit Suisse is downgrading PETM to Neutral from Outperform as, unlike other industry leaders, PETM is not only seeing sales slow, but is seeing margins decline as its mix deteriorates. Taking away the earnings upside moves PETM down on firm's investment attractiveness scale. Firm is lowering their price target to $21.
Investment case: PetSmart has always been a tween’er that has moved on its own results. It does not offer the cyclicality due to its food sales that investors looking for an economic uplift can find in many of firm's names. Nor does it offer the secular story that CSFB's DIY auto names do. However, the growth of services, lower expense growth and premium food inflation seemed enough to keep this stock beating expectations. That is no longer the case, with PETM losing some of the inflation push from premium, facing some pricing battles in commodity and watching its high margin hard goods comp more negatively. That makes for a less attractive near term story.
Catalysts: The near term catalyst for the downgrade was management’s lowering of second half earnings guidance while leaving sales guidance the same. That points to weaker than expected margins in the key hard goods category for Christmas as well as more competitive pressures than previously projected. CSFB believes that they will have opportunities into next year to revisit this well managed chain.
Lower comps in 2H as expected, but a headwind for stock: As CSFB's shows above, PETM’s quarter over quarter relative stock performance has historically been tied to its same store sales growth. While it has been well documented that comps would be weaker in 2H as PETM anniversaries the significant inflation benefit it got last year and now even less inflation. Therefore, they believe it will be difficult for its stock to outperform as comps get worse, particularly as most other retailers show sequentially better comps against easing comparisons in 2H. PETM management is projecting comps to be flat in Q3 and while that is essentially flat on a 2 year basis with Q2’s trend, headline comps will still be weaker than Q2’s +3.9% as shown below. The difference for PETM is lower inflation and trade downs by consumer.
- Piper Jaffray is lowering PETM to Neutral from Overweight and lowering their target to $21 from $25. While the firm notes they do not like to downgrade stocks on the heels of a negative guidance revision, they see two notable headwinds that will likely mute EPS growth through 2009 and into 2010. In particular, they now believe price deflation on the pet food category is a strong possibility (likely in early 2010), which has negative implications for both comp and gross margin dollars. Also, missteps in the hardgoods business during the first half now removes their confidence that this higher margin category will improve meaningfully in the near future. As a result, Piper is now estimating EPS to decline y/y for the next 4 quarters.
- JP Morgan maintains their Neutral rating but is lowering target to $21 from $25. Firm notes it all really comes down to merchandising and hardgoods sales. PETM reduced its annual guidance due a weaker than forecasted recovery in the highmargin hardgoods business. Food comps (50% of the mix) are driven by price, market growth, and market share. JP Morgan believes that food prices will be flat and the market outside of food is shrinking (perhaps offsetting market share gains; PETM grew share 80 bps LY and expect a similar amount in 2009). Hence, looking over the next twelve months, the ability for PETM to comp is all about driving units per transaction or seeing a recovery in traffic (in other words, hardgood sales). As noted in firm's August 10th downgrade “Back on the Leash”, the secular tailwinds of pet adoption and innovation have (at best) slowed. Thus, sales growth is about PETM being a better merchant, which is also the critical lever to merchandise margin expansion.
Notablecalls: PETM's a tough one here. To get any fills early on one would need to short it down -10%. If you look at PETM's past gap-downs you will see -10% is actually the magic level for the stock. It's loved by many and is likely to bounce.
Yet, the headwinds here look to be for real, so I would expect the stock to drift down a cpl of pts from the $20 level over the next weeks or so.
So, the only way to really play this one is to short the upcoming bounce (if they let you in).
Wednesday, August 19, 2009
- UBS is upgrading ANN to Buy from Neutral and raising their target to $15 (prev. $12) saying they believe the Street is laser focused on a potential turn at the company’s heritage Ann Taylor business, with little mention of Loft. However, they view Loft as the division that should be in the spotlight for two key reasons: one, Loft is currently and will continue to be a more meaningful contributor to total sales, and two, the still very challenging environment could allow Loft to gain share from customers who continue to trade down, especially as the fashion and fits have improved meaningfully, in firm's view.
Loft is currently 50% of sales, Ann Taylor only 30%, with balance at Factory. Loft has become a significant piece of the total business, now representing about 50% of total company sales, up from just 37% in 2003. This compares with Ann Taylor at currently 30% of sales and down from its peak of 55% in 2003
UBS notes their recent channel checks at Loft show positive customer response to new fashion and fit. They have become increasingly impressed with Loft’s product assortment, which has shifted from more basic items to modern, fashion-right and feminine looks under the helm of President Gary Muto (joined Nov ’08).
UBS Q3 est of $0.14 is well above the Street's $0.05; they believe the key difference is in gross margin. They assume 380 bps of GM improvement, which is 200 bps of erosion vs Q2 on a 3-yr stacked basis (despite better product/leaner inventory). ANN’s model is highly sensitive; 15 pts of GM in 3Q equals ~$0.01 to EPS. They are raising their 2009 EPS estimate to $(0.29) from $(0.34) and 2010 to $0.21 from $0.19.
- Piper Jaffray is raising their target to $17 (prev. $11) reiterating Overweight.
In view of what Piper believes will likely begin a pattern of besting consensus expectations in the back half of this year, they are reiterating their Overweight rating on ANN shares ahead of the company's second-quarter earnings report slated for Friday, August 21. That said, they are aware that the market has not been kind to retailers thus far in the second-quarter earnings cycle and they would, as such, use any stock price weakness to begin or accumulate to ANN positions.
Product Holding Price Akin To The Days Of Margin Gains Seen In Fall 2005 and Fall 2006. Firm analyzed five years of product flows and promotional activity for the Ann Taylor division to assess the relationship between "product launch" and initial "price breaks." They found that thus far in Fall 2009, Ann Taylor Stores is carrying the product at full price longer similar to the margin-expanding Fall seasons of 2005 and 2006.
Piper's store checks point to a noticeable step up in higher-priced blouses/woven tops versus the knit dominance in the tops category over the last few fall seasons. In looking at a group of six women's apparel retailers this fall, woven tops carry a higher average unit retail price point over casual knit tops by a factor of 1.8x. They believe this mix bias is tied to new fashion trends and could be a catalyst for overall increases in same-store sales vis-a-vis average price increases.
FQ2 Earnings Report Slated For Friday, August 21st Likely To Highlight Cost-Savings Initiatives & Early Fall Reads. For Q2 Piper is published at $0.02 which is in-line with consensus and compares to management's pre-announcement that EPS could come in "slightly better than breakeven" (announced 7/30/2009). For the year, they remain significantly above consensus at a loss-per-share of ($0.02) versus consensus of ($0.35). For FY11, they are published at $1.10 versus consensus of $0.19.
Notablecalls: While UBS' upgrade looks 'OK', it's the comments from Piper Jaffray's Neely Tamminga that fascinate me. The fact ANN has been able to carry product at full prices in this environment makes me quite positive ahead of results on August 21.
Note that short interest stands at close to 18% in the name, making a squeeze quite possible even ahead of the earnings release. Let's see what happens. The general market isn't doing us any favours so one needs to keep an eye on that.
All in all, I think ANN can trade towards $12 level today (and possibly higher if the market doesn't dump).
Tuesday, August 18, 2009
Tomorrow, CNBC and Fortune present “Fastest Growing Companies of 2009”, a one-hour primetime special profiling the fastest growing companies around the globe. Viewers will see the sectors of the economy that are still booming... and go inside the hot companies that are taking full advantage of their position by posting sizzling growth in a slow-growth world. CNBC Managing Editor, Tyler Mathisen and Fortune Magazine Managing Editor, Andy Serwer will co-host the special.
For a peek at the 100 fastest growing companies, visit http://fastgrowingcompanies.cnbc.com
Program highlights: http://www.cnbc.com/id/32219393
Sneak Preview: http://www.youtube.com/watch?v=4sYFie1Lcjo
Notablecalls: The good people of CNBC asked me to give you a heads up on this coming show. So here it is. Make sure you watch it!
PS: It's RIMM!
- Apple (NASDAQ:AAPL) tgt is raised to $250 from $190
- Research in Motion (NASDAQ:RIMM) tgt is raised to $150 from $100
- Palm (NASAQ:PALM) tgt is raised to $25 from $18.
All three are rated Outperform.
RBC Capital believes smartphones represent the next wave of computing, and are truly “3C” devices – embodying the convergence of communication, computing, and content. In the report, they size the smartphone market, which we view as large, nascent, and underpenetrated. They also forecast the vendor landscape; predicting vertically integrated “challengers”, like Apple, RIM, Palm, and possibly others, will take significant market share from some incumbent cellphone, PC, and consumer electronics vendors. Others that, in their view, are positioned to benefit include: 1) carriers that “get it”; 2) smartphone suppliers/partners; and, 3) emerging/transplanted web, software, content, and media businesses.
Smartphone Market: Huge, Nascent, and Underpenetrated. RBC is raising their smartphone forecast due to: 1) the expected global shift by millions upgrading to smartphones for email, browsing, applications, and content; 2) smartphones’ potential to take market share, not only from voice and/SMS cellphones, but also from PCs, TVs, consumer electronics, and Internet markets – collectively representing over 2 billion users. They are raising their smartphone penetration forecast to 35.1% of global handsets or 504 million units (395 million prior) by calendar 2012. Additional revenue upside may come from new services (carriage fees, advertising, subscriptions, transactions, etc.) and revenues shifting from traditional media (TV, newspapers, web, etc.).
Data is Hard: Challengers to Dominate. Due to important differences from the PC, cellphone, and Internet markets, iconic smartphones are difficult to make, distribute, sell, and support. Thus, the firm predicts a select group of challengers will dominate the smartphone market, given their deep vertical integration (e.g., software/ hardware/ service ownership) and “special sauce” through which they create unique, iconic smartphone experiences – i.e., making complexity simple. They believe successful challengers may double or triple their revenues by 2012.
Some Incumbents to Face Challenges. RBC believes some incumbent cellphone/PC/consumer electronics companies (e.g., Nokia, Motorola, Dell, HP, Sony, Sony Ericsson, and LG) will face challenges and lose market share competing in the smartphone space – held back by technology, cannibalization, and organizational, customer, and shareholder barriers. These issues are not insurmountable; other incumbents may successfully evolve and compete.
Firm is raising their price targets on RIM from $100 to $150, on Apple from $190 to $250, and on Palm from $18 to $25, justified by increased market shares which, as visibility improves to the huge smartphone opportunity, offer upside to financials and potential multiple expansion.
'Come on pal, tell me something I don't know, it's my birthday. Surprise me.'
- Gordon Gekko, Wall Street
So RBC has discovered the Smartphone segment is hot and growing. Good for them! The firm has spent potentially hundreds of thousands of dollars (and god knows how many working hrs) to come up with a 92 pg. analysis stating among things that PALM is worth $25 per share.
I believe the price targets on all 3 mentioned names are the new Street high targets. So expect some buy interest. Especially in PALM. Lol.
Monday, August 17, 2009
Firm notes their view on American Express is largely unchanged from initiation on May 11, 2009, and reiterates their Underperform rating. They remain primarily concerned that returns will not bounce back to near the historical levels investors appear to expect, and given that a good deal of optimism is embedded in the valuation of shares at present, they think AXP is poised for a pullback. Firm anticipates earnings pressure will persist due to:
1) likelihood of persistently above-average levels of credit pressure for the next several years;
2) negative impact from the challenging economic/regulatory environment on billed business and card fee revenue (combined representing roughly 63% of total revenue at 2Q09) as the company pulls back its lending activities;
3) higher capital levels (lower financial leverage) resulting from defensive credit moves, as well as from potential for more conservative regulatory capital guidelines. A bill crafted by Senator Dick Durbin (D-IL) targeting card interchange fees could also negatively impact American Express, though RBC hesitates to put significant weight on this factor given uncertainty of timing or ultimate passage in Congress.
Recent signs of credit improvement reported by the company are positive, though they remain tenuous, and they believe meaningful further improvement will only come as a result of declines in unemployment. Historically, charge-offs continue to rise well beyond the end of a recession, so the firm is not convinced that charge-offs are on the mend, and they think they could erode further later this year. Even if credit trends were to continue to improve, we doubt that charge-offs would decline meaningfully below 7% in even the best case by the end of 2010, meaning earnings performance will still remain under pressure for a significant period of time
Even a Middle of the Road View Suggests Shares Are Over-Valued at Present: So what happens if RBC's anemic recovery view is too gloomy? If they weigh the outcomes based on a less pessimistic probability-based approach, assuming there is a 10% chance of a V-shaped recovery, a balanced 40%/40% chance of moderate or anemic recovery, and a 10% chance of a challenged recovery, shares still appear expensive at current levels, in our view. The chart below illustrates the set of outcomes from this weighting and share prices based on various 2012 forward P/E and P/B multiples, assuming a 12% discount rate.
Exhibit : Discounted Present Value of AXP Shares – Probability-Weighted Approach
Caveat Emptor - Reiterating Underperform: Investors should be wary of owning shares at current levels, in firm's view. They continue to believe that at recovery AXP will more likely see lower than historical ROE, and that earnings growth will also be more modest than in the past. $20 price target is more reasonable for shares on this basis.
Notablecalls: Here are some thoughts on this call:
- The market surely favors the call today. The stock seems to have gotten ahead of itself in recent weeks and is due for a sharp correction. RBC provides the que.
- Note that Citigroup upraded AXP to Buy and added it to their Top Picks Live list with a $36 tgt. That's not much upside. RBC's $20 tgt kinda implys the risk/reward ain't spectacular here.
- I'm troubled by RBC's 10% probability of a V-shaped recovery. Could the market be THAT wrong? Because right now it seems everyone is expecting a V-shaped bounce off the lows.
- Why did BAC rally so big on Friday? The word is it was in anticipation of positive master trust data due out this week. That's something to think about because it surely will have an impact on AXP as well.
How much will AXP fall today?
It's going sub-$31 for sure...next stop 30.50 and then maybe even lower. We could see sub-$30 levels as soon as today if the market doesn't put together a bounce.
Friday, August 14, 2009
Firm notes that after a "missed" Phase III trial of VIAject in diabetes driven by heterogeneity of results in India, investors are assigning low probability of regulatory success. At the same time, investors have been looking for the next "surprise" FDA approval, and they believe VIAject represents a potential candidate. If Leerink's thesis is correct, BIOD will be one of the top performing biotech stocks over the next 18 months, and with a modest $100M market cap, they believe the upside opportunity is too compelling to pass up.
Blame It On Rio (Or In This Case, India). Heterogeneity of data from patients in India for the Type I diabetes study means they should have been excluded from the analysis, in which case the study met non-inferiority criteria. In the ITT analysis including patients from India, the study failed to meet non-inferiority, although per-protocol and completers analyses met non-inferiority. It turns out that many of the blood samples from India sat in the heat for weeks on end, which is known to increase variability in measurements.
No Guarantee On Approval, But It's S.C. Insulin, Not Rocket Fuel. While investors see missing an endpoint as the "kiss of death" for regulatory prospects, Leerink believes the totality of the data support VIAject approval. Ultimately, VIAject is human insulin, which is titrated to optimal effect anyways, and the drug has demonstrated a more physiologic profile relative to human insulin and rapid active insulin analogs. They fail to see the rationale in forcing BIOD to repeat clinical studies to achieve a highly predictable efficacy endpoint.
Pain On Injection Is A Pain In The Past. After adjusting VIAject to a higher concentration that reduces the volume of administration and establishing bioequivalence to the lower concentration used in Phase III, VIAject's local tolerability has improved substantially.
Partner Interest Should Be High. With NVO developing its own faster acting rapid insulin, LLY and SNY should be in the market for their own candidates, while other diabetes players should have VIAject interest as well.
Leerink's $13/share valuation is represents a 17x multiple on their 2015E EPS of $0.77, which is a premium to midcap biotech stocks which trade closer to a 2010 EPS multiple of 15x. The premium valuation reflects BIOD's projected and sustained earnings CAGR of ~26% from 2015-2020.
Notablecalls: Could it be that BIOD is the next small-cap biotech stock to rocket?
The analyst Guy Moszkowski is upgrading C to Buy from Underperform because: in firm's view, credit quality is stabilizing; technical overhang of new-share issuance is past; and, given Citi’s new disclosure of core Citicorp vs non-core CitiHoldings, they see limited bookvalue downside potential. PO is $5.75, about Book Value.
Consumer credit quality stabilizing; psychology shifting
2Q bank results showed consumer credit delinquency stabilizing, which should drive better credit loss trends in quarters ahead. This is of course key for Citi and its large portfolio of mortgage and other consumer debt. With crisis largely past for Citi, we believe psychology on the company is changing.
Technical risks have passed
On July 30, Citi converted $58bn of Preferred to Common, quadrupling share count and doubling float (some shares, such as US Government’s, will not trade immediately). Merrill Lynch notes they were concerned about this technical overhang, which did briefly bring the shares near their downside target, but it has now passed.
“Worst-case” scenario suggests limited downside
Current BVPS est. at $5.91, diluted for recent preferred-to-common exchange; and Tangible at $4.28. Merrill's “burn-down” severe-case analysis puts Book no lower than $3.88 in ‘11. More realistic look suggests ‘11E BV could approach $7. Also, Tier-1 Common ratio remains well above 4% in their “worst-case” scenario, suggesting to us recent preferred-to-common exchange has provided more than sufficient capital cushion which was the objective of the gov’t “stress test” exercise and the exchange.
PO of $5.75 as Book Value stabilizes
ROE in ‘11, as earnings begin to normalize, forecast at 10-11%, so they expect C will, in the next 12 months, trade at around Book. Thus our PO moves from $2.50 to $5.75. Prior PO was based on worst-case outcome, and on Tangible, not Stated, Book. But history suggests C will likely begin again to trade based on actual, not tangible, BV with probability of “worst-case” outcome receding at this point.
Notablecalls: This surely is a major change in thesis from one of the largest investment firms. Merrill is out saying there is at least 40% upside in C.
I expect the stock to move in the $4.40 area today.
Notablecalls: WOW! (more to follow!)
Thursday, August 13, 2009
- Started his career as a prop shop trader, has spent past 5+ years as a HF trader at a large fund.
- Mostly intraday trading
- Proven track-record
- Departure from current firm NOT related to performance issues
If you happen to have a vacancy at your firm or know a firm that has one, shoot me an email.
Notablecalls: Good guy, top member of NCN. I watched him make 10-15 mln last year trading mostly large cap stocks. Has a very good feel for the market and can navigate pretty much in any situation.
I strongly recommend you contact me if you need a capable guy on your team.
Leerink out VERY positive again ..We believe HGSI is poised to become the next large cap biotech... GILD had the same market cap in January 2000. Since then, the clear winner has been GILD as it became the second largest biotechnology company. GILD attained this status by cornering the HIV market in a manner similar to how HGSI could now potentially corner the lupus and other markets...
We believe an acquisition could be the greatest impediment to HGSI becoming the next big biotech. If GSK performs an analysis similar to that outlined above, we believe they will realize the incremental 50% rights to Benlysta is likely worth much more than HGSI's ~$2B market cap...Reits Outperform and $30 tgt.
Notablecalls: Stock should fly on this!
Firm is downgrading their rating on Palm shares to SELL from HOLD given their belief that Pre sales have slowed significantly. Their checks have shown that Pre sales have slowed to approximately 100,000 units in July, from approximately 200,000 in June, and Morgan Joseph believes August shipments are tracking lower than July's. This would bring Pre shipments below our previous 400,000 estimate for the F1Q10 quarter. As such, they have lowered their Pre shipment estimates to 350,000 for the August quarter. Firm believes that their 400,000 units estimate for Pre was a low estimate relative to Street expectations and, as a result, believe that should the company even achieve these numbers, it would be viewed as a disappointment by investors. Morgan Joseph also believes non-Pre shipments were lower than expected for the August quarter primarily as a result of cannibalization by pre purchases. They expect F1Q10 sales and a non-GAAP EPS loss of $158mm and $0.24, respectively.
Firm is lowering their CY2009 sales and non-GAAP EPS estimates to $484mm from $677mm and to a loss of $1.72 from $1.52, respectively. They are also lowering CY2010 estimates to $612mm from $879mm and EPS loss to $0.90 from $0.63, respectively. With Palm shares currently trading at 3.6x new CY2010E EV/Sales and significant road-map risk, they believe Palm shares are currently overvalued, especially compared to Research in Motion's present 2.3x multiple on CY2010E EV/Sales.
Should sales prove to be in line with firm's checks, they believe price cuts may be looming going into the holiday season in an effort to spur holiday sales of the Pre. This could, in turn, hurt Palm margins as they believe that Palm will have to make price concessions to Sprint. Should margins be negatively impacted, profitability would be pushed out beyond management's FY2H10 guidance, which they are now increasingly skeptical about, and would make raising more money an increasingly realistic probability.
Notablecalls: I must say the call makes perfect sense. Gartner released their Q2 WW mobile sales data yesterday morning and their comments were the following:
'... This quarter also saw the debut of the long-awaited Palm Pre based on the new web operating system. "This device attracted a lot of media attention but showed mixed results at the cash register as sales only reached 205,000 units," said Ms Cozza. "Palm currently ranks tenth in the smartphone market and Gartner remains concerned about its ability to gain traction outside the US market, where its brand is less strong...'
I think PALM is dead. Why? Now that I have toyed around with Bberry and Apple's iPhone I just don't see how Palm Pre can beat these at the counter. What exactly does the Palm Pre have that the competitors (even Nokia) don't have? Ability to run several apps in the background? Yeah, nice but what else? Really.
the PALM has been reduced to a geeky toy and will remain that.
The only thing keeping the shares away from the abyss is the 27% short interest.
Today I see the shares hitting $12 (or possibly lower).
JP Morgan is upgrading Assured Guaranty (NYSE:AGO) to Overweight from Neutral and establishing a $23 price target.
According to the analyst they are upgrading AGO to OW on the results of our deep dive, security-level MBS loss analysis for the AGO/FSA combined MBS portfolios. Firm concludes AGO will need to add $745M to combined reserves for mortgage losses over the next few quarters. However, given AGO should generate $1.7B of unearned premium discount from the FSA acquisition completed on July 1, created by purchasing the company well below book value, modeled losses are still well covered by projected earnings. Based on JP Morgan's FY09 EPS estimate of $2.35, they are upgrading shares to OW and assigning a YE09 price target of $23, which is 10x earnings vs. a historic 10.5x multiple. Although they believe the stock warrants a premium to historic levels due to its dominant market position, they are hesitant to assign a higher multiple, as the firm is skeptical of long-term growth trends in financial guarantee.
Security-level MBS analysis projects $2.4B of future losses in base case. Firm's analysis assumes another 10% decline in home prices nationally from current levels in the base case, with varying default and severity assumptions across vintages and product types provided by J.P. Morgan ABS research. After adjusting for June 30, 2009 MBS reserves at AGO and FSA, they model $745M of additional reserves are necessary on a present valued basis. They stress case of an additional 14% decline in home values nationally would require $914M of additional reserves.
TruP CDO losses likely, but accumulated unrealized loss from derivatives should cover most of it. We model the Trust Preferred. CDO portfolio losses will total $300M on a present value basis, but assume this impairment is covered by the $958M of credit derivative liability on AGO’s balance sheet in 2Q.
Increasing estimates on acquisition, updated reserve estimates. Firm is increasing their FY09 Op. EPS estimate to $2.35 and introducing their 2010 estimate of $2.87. JP Morgan notes their estimates are well below consensus, which may be due to the fact that their peers have not performed a similar security-level analysis.
Upgrading to OW on valuation. Although the positive earnings impact from the FSA acquisition is straight-forward, they had reservations regarding the additional $15.4B of MBS exposure AGO was taking on through the deal. However, after completing this security-level analysis, the firm feels significantly more comfortable with the magnitude of potential future losses.
Notablecalls: This looks like the strongest call of the morning. I tend to like this one as JP Morgan carries weight and the chart looks like it wants higher.
JPM's estimates are below those of its peers and the expectation of another 10% decline in home prices seems prudent in light of recent bottoming in the housing market.
I suspect a 4-6% move is in the cards today.
Wednesday, August 12, 2009
Commercial Vehicle Group (NASDAQ:CVGI): Upgraded to Overweight from Underweight at JP Morgan; $7 target
Firm notes that over the past three and a half weeks, CVGI is up 176%. Despite the stock’s recent appreciation, they are upgrading CVGI to Overweight from Underweight into an improving liquidity profile, solid management execution through the current downturn, and signs that the North American Class 8 truck market (~50% of normalized revenue) is at, or close to, trough.
Improving liquidity profile. CVGI recently completed a partial debt exchange and revised its credit facility agreement. In JP Morgan's view, the transactions buy CVGI time for end markets to recover, as the exchange offer should lower CVGI’s cash interest payments through the beginning of 2011, while the revised credit agreement significantly reduces the risk that CVGI will violate its debt covenants over the near term.
Solid execution in a dire market. In firm's view, CVGI’s management team has executed well in the current downturn given the extremely sharp declines in end market demand. Over the past two quarters, CVGI’s revenue “fell off a cliff,” down 45% and 50%, respectively, in Q1’09 and Q2’09. However, they were encouraged by CVGI’s Q2 operating performance, with CVGI’s continuing operating margin improving by 420 bps sequentially. In JP Morgan's view, solid execution limits downside risk until end markets recover as well as potentially allowing CVGI to produce higher margins in the next cycle than in past cycles.
Class 8 market close to trough. Firm estimates that CVGI generates roughly 50% of its normalized revenue from the NA Class 8 truck market. Leading indicators suggest that freight is at, or near, cyclical trough, which should eventually lead to a meaningful recovery in trucker profits and truck orders. They continue to believe that Class 8 builds will trough at 115k (down 44% YoY) in 2009 before improving to 166k (up 45% YoY) in 2010, with builds rising toward normalized replacement demand levels of 240k-250k by 2011 or 2012. Additionally, rising military production could also provide a tailwind for CVGI, particularly from OSK’s recent M-ATV win.
JP Morgan is introducing a year-end 2009 price target of $7, which represents 81% upside from last night’s close. With liquidity risks abating, investors should increasingly focus on CVGI’s normalized earnings power. Applying a 9x multiple on firm's 2013 normalized EPS of $1.00 and discounting back yields a 2009 year-end price target of $7.
Notablecalls: This is one crazy call from JP Morgan, which is partly why I like it. Generally, the inflection point in the commercial vehicle stocks occurs 6-9 months before the peaks and troughs of the end markets. I guess this is the reason why JP Morgan is upgrading CVGI today. They don't mention this in the call but I'm sure that's what behind it. They didn't want to be the ones upgrading the stock too early (credit problems) and are now playing ketchup.
JPM is looking at the next cycle and calling for at least $1 in normalized EPS, which should eventually send the shares way higher than the current $7 target. But let's face it - who cares about what happens in 2013.
The chart looks like it wants higher and I suspect $4.50 may be in the cards today. I can even see this one trading to $4.75, if the mo-mo crowd picks it up intraday.
The only problem is you have to pay up to get fills. Any fills.
Tuesday, August 11, 2009
Bottom Line: Leerink's statistical power analysis confirms an ~85% likelihood of success for BLISS-76 data in November. They considered the major factors which could influence p-value via effect size and variability in the context of past results for Benlysta in BLISS-52 and Phase II. Reiterate Outperform, raising 12-month fair value to $30 from $16.
As shown by the tables within, 67 of the 80 (84%) most likely combinations of response rates and standard deviation included in Leerink's sensitivity analysis would produce statistically significant (p<0.05). They believe BLISS-76 has been derisked after BLISS-52 results since the major difference between the two trials is geography, and the patient population in BLISS-76 (US & EU) is more similar to the Phase II trial which was data mined in order to design Phase III.
An 8% response rate delta between Benlysta and placebo on the primary endpoint would be statistically significant in BLISS-76 if the same standard deviation as seen in BLISS-52 occurs. Furthermore, a 9% delta would be sufficient at all standard deviations analyzed. Recall that Phase III (10mg/kg), Phase III (1mg/kg), and Phase II showed deltas of 14%, 8%, and 17%, respectively. At the lowest standard deviation analyzed, even a 6% delta in response rates would achieve a p=0.042.
Standard deviation should not be that different in BLISS-76 as compared to BLISS-52. HGSI appears to have done a good job controlling for most of the factors which may cause variability, judging by the consistent standard deviations seen in Phase II and BLISS-52. On the one hand, lupus patients in North America and Western Europe (BLISS-76) may be more uniformly treated than in Asia, Latin America and Eastern Europe (BLISS-52); however, this may be offset by more genetic heterogeneity in the BLISS-76 population vis a vis BLISS-52.
Placebo response rate could be lower in BLISS-76, allowing an easier separation in the curves due to effect size. Studies done in the U.S. and Western Europe frequently show less of a placebo effect due to better care overall and less pronounced effect from entering studies.
Notablecalls: $30 from Leerink Swann is the new Street high for the stock. This should send the stock higher, testing for another breakout following ThinkEquity's upgrade a week ago. It's quite clear positive momentum ahead of the BLISS-76 data release in November is building.
Now that Leerink Swann, one the premier biotech houses is calling the trial a ~ 85% success, the stock should take off from here. Note that by many, Leerink is considered to be the Axe in HGSI.
Leerink was very positive on HGSI ahead of the BLISS-52, which sent the shares up 500% (!) in the March-July timeframe.
I suspect the stock will trade over $15 level today...reaching $15.50 (again) and possibly surpassing it.
Nice job Leerink!
Friday, August 07, 2009
Firm notes that while KG faces near-term headwinds, they believe these issues are already largely reflected in the stock’s low relative valuation. They believe that the approval and commercial success of Embeda, which could be the first “abuse-deterrent” opioid available in the US, could drive the shares higher over the next 12 months.
Big market opportunity for less abusable product
KG’s clinical work has shown that crushed Embeda capsules have a similar abuse potential relative to intact capsules, and significantly lower abuse potential relative to immediate-release morphine. This is important given that opioid abusers commonly crush drug to facilitate faster absorption (through oral, injectable, and nasal routes). At branded pricing, the firm estimates the long-acting morphine and opioid markets represent sales opportunities of $1.5bn and $7.1bn, respectively.
Raising target to $14 from $10 on DCF methodology
Because EPS could vary significantly in the near/mid term due to various factors (ie launch spend, Skelaxin generic timing), Merrill Lynch believes a discounted cash flow (DCF) analysis may be more appropriate than a P/E approach to assessing the long-term value of KG. For reference, their $14 target equates to a 2010E P/E multiple of 13.6x, relative to the group average (12.4x) on 2009E.
KG expects approval soon
ALO filed for approval of Embeda on 6/30/08 and the application was granted priority review status with an FDA action date of 12/30/08. The FDA extended the review without setting a new action date. According to KG, the extension was primarily related to the risk evaluation and mitigation strategy (REMS) proposal. At an investor meeting with KG management that the firm hosted on 7/7/09, KG described an “almost daily” back-and-forth with FDA, and that it continued to believe that final approval was weeks (not months) away. On its 2Q09 earnings call on 8/6/09, KG expressed confidence that it is close to approval.
Notablecalls: I like this call as:
- It's a tier-1 firm upgrading KG. Merrill (still) has a large following.
- The chart looks good
- There's a n-t catalyst in place (Embeda approval).
I think KG will trade to $10 (or possibly higher) on this upgrade.
Piper expect share price appreciation to accompany consistent fundamental improvement & profitability potential in next 12 months. Q2 results outpaced estimates and guidance; clear signals that company is achieving early turnaround success.
1) Strength in consumer demand (on lowered expectations) is encouraging; brand equity remains high; visibility limited but improving.
2) Wholesale/retail, U.S./int'l, and product mix all contributing to better margin profile; mgmt reiterated its med-term mid-teens op margin target.
3) International markets represent 60%-plus of revenues; Asia strength a key driver.
4) Direct to consumer platform mitigates risk tied to domestic wholesale order volatility; DTC exceeds 50% of U.S. revenues; growth of 20%-plus is reasonable.
5) Company is bank debt free; $60M in cash ($0.70/share); receivables collection much improved and inventory levels nearer to sales needs; 2.2M in carryover inventory remains of 8M excess.
Confidence in direction of sales and margin; visibility into specific quarterly results remains limited: Firm notes they are upgrading to Overweight based on the premise that key concerns surrounding the company's fundamental health have been alleviated and early signs of a successful turnaround exist. It's much too early to assume peak sales and margins are achievable but we do believe steps have been taken to establish a reasonable trajectory toward achieving profitability in 2010.
Raising estimates; model evolving toward direct to consumer with higher margin profile: They are raising their FY09 & FY10 estimates, predicated on a higher degree of confidence in sales prospects and ongoing efforts to right size and refocus the operating infrastructure toward a rapidly growing direct to consumer model. If we assume that retail & Internet sales represent 40%-50% of total and grow at a rate of 20%, the legacy wholesale business could show little or no growth and the company could still achieve 5%-10% top-line growth in 2010. Firm's revised model assumes operating margin in the mid-single digits (6%), generating earnings of $0.30.
Notablecalls: It's quite obvious the results were a surprise to most market participants (especially the short kind).
I think the stock can reach $6+ level in the very n-t.
Thursday, August 06, 2009
Firm notes they are downgrading CBST based on risk of unfavorable in-licensing/acquisition, current valuation, Cubicin litigation risk, and low probability of takeout. Importantly,
1) Firm remains cautious ahead of a significant in-licensing or acquisition;
2) They believe CBST is fairly valued at $17.00-$19.00 after adjusting for an in-licensing or acquisition;
3) They believe Cubicin patent litigation represents a significant revenue overhang;
4) They believe an acquisition is unlikely given the generic Cubicin challenge and ensuing patent litigation.
Oppenheimer continues to believe a meaningful late-stage acquisition/product in-licensing is required to maintain bottom-line growth, increasing risk and potential R&D expense. They see a limited number of opportunities in the antiinfectives space, and believe execution risk increases if CBST shops outside of its core domain.
Cubicin Patent Litigation Significant Revenue Overhang. Cubicin revenues could decline significantly within the next 1-2 years assuming a generic entrant. Based on our understanding of the Cubicin patents, TEVA may request summary judgment, representing significant downside.
Acquisition Unlikely Given Generic Challenge. Oppenheimer believes an acquisition is unlikely given the risk of generic Cubicin within the next 1-2 years. Also, recent stock appreciation based on a potential acquisition is unwarranted.
Notablecalls: CBST traded up 10% yesterday on takeover speculation. We saw comments out of RBC Capital around noon saying they spoke to management and there was nothing that would indicate a deal was in process. The stock ticked lower on this but the shorts got squeezed into the close.
Must say I have seen this movie before. It usually ends up with CBST giving back almost all of its gains over the next couple of days as speculation cools down. Now it looks like Oppenheimer is here to speed up the process. Note that none of the stuff they are saying is new but it will cause pain for the longs today.
$20.50 downside target in the the s-t looks prudent here, making anything above $21 a short.
Can Revlimid Be A $5B+ Drug? Celgene’s small molecule franchises have finite patent lives and its pipeline appears immature. Cowen's NPV analysis of the company’s oncology franchises suggests CELG shares are worth $45 assuming Revlimid sales reach $5B+ and the drug’s 2026 U.S. polymorph patent holds up to scrutiny. Sensitivity analyses indicate CELG might beworth between $22/share and $61/share depending on one’s assumptions for Revlimid’s peak sales potential ($2-8B) and patent life (2016-2026).
How Much Will MM-015 Really Matter? Shares are up 25%+ in the wake of positive data from MM-015 as the bulls anticipate a meaningful acceleration in Revlimid sales driven by 1) greater front-line penetration and 2) increased adoption in maintenance. Although the firm expects the average duration of Revlimid therapy to steadily increase, they believe there is risk that the MM-015 results may not support the superiority of Revlimid relative to induction therapy with Velcade, or conclusively establish the clinical benefits of Revlimid dosing in maintenance. They expect Revlimid sales will continue to struggle to meet consensus expectations.
Intellectual Property Risk Ahead. Cowen expects the next 12-18 months to feature more discussion around the potential for generic threats to Celgene’s major franchises, including a challenge to Thalomid’s patents (ongoing), the U.S. expiry of Vidaza’s exclusivity (2011), and likely ANDA filings on Revlimid (late 2009/early 2010).
In Cowen's experience, oncology drugs rapidly penetrate new markets, followed by a plateau in sales growth. Examples of this phenomenon include Tarceva, Erbitux, Nexavar, Herceptin, and Thalomid. Less often, as exemplified by Rituxan or Avastin, oncology therapeutics grow for many years driven by new data indications. Investor expectations place Relvimid firmly in this latter camp. Street consensus calls for sales to grow from $1.65B in 2009 to $3.8B in 2013. This growth is expected to come from substantially higher sales in myeloma (greater ex-U.S. market penetration, more front-line use, and longer duration of therapy) coupled with modest use in NHL and CLL. Analysts have constructed fairly complex models of the myeloma marketplace, many of which have Revlimid reaching $5-6B in peak sales. Yet despite these great expectations, Revlimid is struggling to achieve consensus sales figures during a time period when growth should be rapid. The chart above depicts changes to consensus 2010 revenue expectations for Celgene over the past 18 months
Notablecalls: Eric Schmidt, Ph.D. and his biotech team at Cowen have done a terrific job with this call. If you happen to be long CELG I suggest you get your hands on a full copy and study it hard.
The stock is up almost 20 points from its lows & is looking toppish. And then Cowen comes and slams it hard. This one will take a dive. I'm calling it Actionable Short Call here.
I see it down 2pts+ today alone.
Note that most analyst are positive on the name: 19 Buys, 5 Holds and just one Sell.
According to the firm the upgrade is based on a material upgrade to their copper price forecasts. Freeport is the largest pure-play copper miner and provides high leverage to firm's more positive copper view. Sensitivity to copper prices: a $0.10/lb change in copper is roughly $0.50 in EPS for FCX. They are raising their 2010 EPS to $9.25/sh (was $2.85). At this level of EPS, FCX should be able to generate over $10bb EBITDA and $10/sh of FCF. Dividend reinstatement also a high probability event for 2010.
Move copper outlook to high-end of Street
Firm is incorporating new base metal forecasts into our models. Their new copper price deck is as follows: 2009-$2.15/lb (was $1.76), 2010-$3.18/lb (was $2.00), 2011-$3.03/lb (was $1.90). Gold outlook remains unchanged at $1050/oz for 2010. New copper forecast is well above consensus in the $2.00/lb range and above the forward copper price of $2.70/lb. The drivers of more positive view on copper are:
1) a tight concentrate market;
2) lack of new supply in the pipeline;
3) an end to de-stocking; and
4) improving demand in OECD/China.
Merrill Lynch sees copper as structurally one of the best positioned base metals over the long term. Firm notes their prior Underperform was predicated upon an end to Chinese stockpiling leading to higher LME inventories and a downward correction in commodity prices. However, despite a 70% YTD rise in Chinese copper imports, underlying demand appears to be recovering and should be sustainable into 2010.
Increase PO to $87 on higher 2010 outlook
They are increasing their price target to $87 (was $49), given the magnitude of our 2010 EPS revision. Firm's target multiples for P/E, EV/EBITDA, and P/B are generally consistent with their prior PO and in line with midcycle multiples. Based on the current FCX price, they see roughly 35% upside to revised target.
Notablecalls: I view this as a more technical call than anything else. The chart looks like it wants new highs and Merrill/BAM provides the mo-mo crowd the reason to push for a breakout.
I see them gunning for $67+
Wednesday, August 05, 2009
In Keybanc's view, the earnings prospects for FY10 from its recent MRAP – ATV contract win (the crux of their upgrade on July 6) appears to be discounted in the current share price. While they expect there could be modestadditional upside in the shares, and remain encouraged by OSK's additional MRAP prospects including a follow-on order for potentially 1,300 vehicles (bringing the total program quantity to 5,244 vehicles) in addition to numerous parts and service contracts that could amount to hundreds of millions of revenue potential, they believe the majority of the "easy money" has been captured. Since their upgrade on July 6, OSK shares have appreciated 61.7% vs. the S&P 500's increase of 11.6%. This outperformance was driven by the positive earnings step function in FY10 (firm is modeling $3.25 vs. consensus of $2.48 from their estimate of a loss per share of $0.54 in FY09) and the potential to not only bridge the earnings gap to when fundamentals begin to improve in its challenged Access Equipment & Commercial segments, but to also improve its liquidity position.
While they still expect these drivers to materialize, Keybanc believes three primary factors could limit the near-term upside in the shares:
- First, the continuation of future positive news flow is likely to abate. They believe OSK will be awarded the additional 1,300 vehicles and consensus estimates for FY10 ($2.61) will increase; however, the incremental news of unexpected awards (FMTV, Australian Land 121) is uncertain.
- Second, current valuation fairly reflects OSK's future prospects and normalized earnings.
- Third, in their view, the likelihood of an equity offering is becoming a higher probability given the run up in the shares coupled with the lack of a defense performance payment announcement thus far. While an equity offering would pose a near-term risk to the existing share price, depending on pricing level, the firm anticipates being supportive of a deal as a result of the prospect of an improved capital structure.
As a result of the aforementioned factors, they are downgrading their rating on the shares of OSK to HOLD from BUY.
Notablecalls: I think this downgrade will work as Keybanc has done a good job covering the stock lately. Some of their clients are sitting on hefty gains and will be looking to sell in the n-t. So you either short now or fade the upcoming news of the 1,300 M-ATV order.
I'm guessing 4-5% downside in OSK today.
Tuesday, August 04, 2009
Human Genome Sciences (NASDAQ:HGSI): Upgraded to Buy at ThinkEquity; target raised to $26 (new Street high)
Firm notes they spent the past few days evaluating their model for Benlysta and conclude that their estimates are just too conservative. They believe BLISS-76 will, more likely than not, confirm the results seen in BLISS-52. Based on a revised model, they raise their price target to $26 per share, which justifies a raise of rating to Buy.
ThinkEquity revised their model after speaking with several people in the industry and the company, which has done extensive primary research. This analysis points to the fact that in the U.S., there are approximately 325,000 patients treated for some form of Lupus. They believe that at least two-thirds of that group are candidates for treatment with a biologic therapy, or approximately 200,000 patients with mild to severe Lupus (SLE). They pick what they believe is a modest price point of $25,000, between what patients are paying for TNF biologics on the low end and MS therapies on the high end. Firm also assumes market penetration over time of 35% share. Next, they assume the EU market is slightly larger than the U.S. market and apply the same assumptions
The result of these changes triangulating an EPS, sum-of-the-parts, and FCFF model points to $26 per share. At first blush, the firm notes they are surprised by the numbers, but what one must recognize is that Lupus is an unmet medical need and Benlysta is essentially a benign drug that has shown itself to be active, and therefore helps patients. Given the marketing power of Glaxo, they believe that patient awareness will grow rapidly and that physicians will prescribe it. Primary research conducted by the company points to a medical community that is very aware of and willing to use Benlysta. These assumptions point to Benlysta's potential to be a $2.7 billion dollar drug and may eventually prove to be conservative.
Next Event: BLISS-76. Given the similarities in trial design between BLISS-52 and BLISS-76 and the statistical significance of the recent BLISS-52 data, a 57.6% response rate at high dose versus control at 43.6%, they believe it's reasonable to assume that a positive outcome is likely.
Notablecalls: Note that the $26 target is the new Street high (by a mile). The logic behind the price target looks solid at first blush and I think will bring in the next wave of buyers.
I suspect the stock will trade over $15 level today and may even reach $15.50.
As one of the few pure plays in both the managed hosting and colocation space, SAVVIS should see a revenue inflection point this year due to:
1) a favorable supply / demand imbalance for data center space;
2) robust adoption rates in the near term for proximity hosting; and
3) the encouraging long-term growth outlook for data center industry demand due to factors such as cloud computing.
Morgan Stanley believes that SAVVIS represents a turnaround story from last year as management has raised guidance for each of the last two quarters, and they believe the company should generate strong free cash flow for 2009. In firm's view, the stock trades at a relatively inexpensive 2011e EBITDA multiple of 5.1x given the encouraging growth prospects in the data center space.
What's new: Morgan Stanley rates SAVVIS Overweight as there is 43% upside implied by their price target. Their 2009 EBITDA estimate of $209.2M is at the high end of management’s newly raised guidance and $7.4M above consensus; 2009 FCF estimate of $43.7M is near the high end of guidance. Firm notes that the stock has a 16% recurring free cash flow yield, higher than Equinix and the tower stocks (AMT, CCI, and SBAC). SAVVIS cited an improving environment overall and a 4Q09 recovery for revenues and EBITDA, consistent with their expectations. Despite expected revenue pressure, 2Q EBITDA (ex a one time early termination fee) of $48.6M was ahead of Morgan's $46.1M estimate and consensus of $43.9. Cash gross margins came in at 45.4%, better than firm's 43% estimate. The recently announced 105k square foot data center expansion in Weehawken, NJ (35k sq ft expected for completion by 2Q10) should position the company for growth in proximity hosting.
Notablecalls: Morgan Stanley's Simon Flannery has done a pretty good job with this call - for obvious reasons I can reproduce only a miniscule part of it on the page. If you can get your hands on the full copy, I suggest you read it.
This call has many of the traits I usually look for in a favourable situation/call:
- Valuation (SVVS is trading well below those of say EQIX)
- The chart (new highs are coming)
- Upgrade from a tier-1 firm (MSCO in this case). And it really looks like they have put some work into it.
The only missing part in my book is a n-t catalyst (although the analyst is hinting SVVS may raise guidance next time they report).
All in all, I think this is a terrific call and will push the stock up by 6-8% today. The futures are looking down at the moment, that's my only worry apart from getting decent fills.
Monday, August 03, 2009
- Baird is downgrading HURN to Underperform with a $15 tgt (prev. $50) on lack of confidence in their estimates as their previous concerns about retention of MDs has increased significantly given the restatement of earnings, potential reputational damage, the SEC inquiry, senior management turnover, disappointing 2Q09 results and lower 2009 top-line guidance indicative of no bonuses being paid in 2009.
Firm's $15 price target represents 5.0x FTM estimated EV/EBITDA including stock comp expense or half the average of the previous six quarters given the significantly negative implications of Friday's announcement. While they believe there is significant franchise value that should be applied to HURN's current personnel, they have no confidence on the level of people that will be retained. Until the firm can gain confidence that attrition will be better than feared and that the reputational damage will be minimal, they can only recommend that investors avoid the stock.
- William Blair downgrades HURN to Market Perform noting Management’s lack of communication with the Street surrounding this news makes it impossible for use to fully understand what has happened with the accounting or with recent business trends. In addition, these announcements and the stock price decline introduce a number of issues that they do not expect to get answers about for a while. Specifically, the news about a significant restatement and SEC investigation could damage the company’s brand (especially given the accounting background of its consultants), could lead to increased consultant turnover (especially given the large amount of stock used as compensation for Huron's consultants), and will result in a number of shareholder lawsuits. As a professional services company with a relatively high amount of debt, it is not implausible to argue that this event causes the company to languish for an extended period of time or eventually unravel. Given that the risks and uncertainty are very high right now and the firm does not expect to get a lot of clarity regarding the company’s risks for a while, they cannot recommend purchase even at the company's reduced price in the after-market and their rating is now Market Perform.
The range of potential explanations ranges everywhere from a.) outright fraud to b.) the former shareholders of these business shared/redistributed some of the proceeds from the earnouts with their colleagues as a reward for helping them achieve the earnout and did not realize this constituted compensation. The departure of the company's CEO, CFO, and CAO could argue that there is some element of the first explanation going on here. However, the fact that the former CEO of Wellspring David Shade is remaining as Huron's chief operating officer, comments in the press release that the redistribution of these payments were based in part on continued employment with Huron and/or personal performance, and the comments in the press release that the company may have to sustain higher cash compensation going forward could argue for the less sinister (although still concerning) explanation. Without further explanation from management is it impossible to know what happened at the company though.
- Oppenheimer is reducing their rating to Underperform and is reducing their 2009 revenue (before reimbursables)/EPS estimates to $650M/$2.00, respectively. Firm's 2010 revenue (before reimbursables)/EPS estimates update to $680M/$2.70, respectively. They anticipate 2009 EPS to be adversely impacted by restatements and a reputational headwind. Firm estimates a moderate recovery in 2010 on gradual macro improvement coupled with aggressive cost reductions.
- Deutsche Bank is downgrading the stock to Hold with a $20 target noting the key concern they have now is consultant and client retention. For the consultants, Huron becomes the key place to recruit from, which will likely create the need for significant retention bonuses even if Huron’s performance is weak for the next couple years. For consultants who joined recently from Stockamp (a $219m acquisition in July 2008), their ties to Huron are even less secure. Retaining high-performing consultants is never easy, for Huron is will be very difficult. The best result for Huron maybe to sell off the various divisions to competitors, but the key question is why anyone would pay for these operating units when you can just recruit the key individuals
- UBS notes the restatement moves $57mm of earnouts to compensation cutting EPS by $2.98 since 06 ($0.19 in Q109, $1.60 in 08, $0.97 in 07, and $0.22 in 06). They expect Huron to release a Q&A on their website this morning.
Firm is assuming the restatement was the result of careless accounting interpretation over 3 years, rather than something sinister, and the parties to blame have left. Most revenue is generated by about 200 MDs who appear blameless, so they think clients may be forgiving. Firm is cutting their 2010 revenue estimate to their prior 09E level and EPS estimates to $1.64 for 09, $2.16 for 10, and $2.63 for 2011.
Notablecalls: What a mess! But is it really fraud? I think not. Given the fact HURN is staffed with accounting specialists, the accounting mishap does look like an unlikely explanation but as the old adage goes - the shoemaker's kids go barefoot.
If this is the case then we may have an eventual bounce candidate on our hands. Yet, there are problems to overcome in the n-t:
- Competitors will be on the attack looking to lure top rainmakers away from HURN. With no bonuses in 2009, some of these people are bound to jump ship. This would translate into lower revenue in the coming periods.
- The management will have to tackle a) the SEC b) angry shareholders and bloodthirsty class-action lawyers. With most of the top dogs gone how will the new people handle situation? They have to spend their time working legal, PR & operational stuff. That's a handful!
- HURN is going to be a tainted stock for quite a while. Big game hunters are likely to steer away from the situation for now.
- HURN has basically no assets apart from the people that work there. Plus, the company had approximately $312 million of net debt at the end of the first quarter. If it falls apart, it really falls apart.
So what to do with the stock?
I suggest most of you stay away from the situation. For those willing to take super-sized risk...$14-$16 is the range you should be looking at for a possible bounce. But don't overstay your welcome. This one could just as easily be a $12 stock.