Morgan Stanley issuing positive comments ahead of Family Dollar Stores (NYSE:FDO) quarterly results next week:
Investment conclusion: We believe Family Dollar will issue reassuring guidance next week, contrary to market concerns, and therefore think the risk/reward is positive headed into earnings. FDO is down 16% in the past month and currently trading at 11.7x our F2010 estimates, close to a trough multiple. We believe once guidance is given and the air is cleared, the stock could see a relief rally.
What the Market is Nervous About:
• Next year’s comp guidance given the most recent quarter comped a 1%
• Inventory levels given the weaker comp
• FDO’s ability to improve margins as overlaps of improved distribution costs, sourcing costs, and markdowns get more difficult
• EPS guidance given sales and margin outlook
• Execution risk in space re-allocation and product assortment initiatives
• New initiatives that may take up SG&A spend
• Benefits of lower gas prices ending in 1Q which could impact lower income spending
Our Take: We believe Family Dollar’s guidance will be reassuring and management could guide to 1%-3% (or even 2%-4%) comps and EPS of $2.10 to $2.30. We also believe management could state that September sales improved from August and explain part of the weaker 4Q comp due to store re-models. As part of those re-models, SG&A was pulled forward into F2009 and should moderate SG&A growth in F2010 to ~2.5%. Furthermore, we believe there will be commentary on a renewed focus on store level profitability.
Firm is also issuing Research Tactical Idea long on FDO:
We believe the share price will rise in absolute terms over the next 15 days. This is because the stock has traded off recently, making short term valuation much more compelling. We believe Family Dollar will issue reassuring guidance when the company reports on Wednesday, October 7th. Investors are concerned that EPS guidance will be well below street estimates, while we believe the company's guidance can encompass street estimates. Furthermore, we believe the call could give other positive data points such as improved September sales and a renewed focus on store level profitability. The stock has underperformed the S&P by 22% over the past month and is currently trading at 11.7x our F2010 estimates. We believe the earnings call will help clear the air and spark a relief rally in FDO shares.
We estimate that there is about a 70% to 80% or "very likely" probability for the scenario.
Action: FDO has sold off recently after comps / preannouncement on Sept 3rd. Morgan Stanley is listing all the concerns above and they do a good job refuting all of these. Given their conviction I would expect the market to listen and send the stock higher today - $27 is very possible.
Wednesday, September 30, 2009
Friday, September 25, 2009
Quick thoughts
Been a busy morning, many calls out there but must say I have no idea how the market is going to be today. Don't know what calls to choose for highlighting so I just give you a list:
* Airlines sector upgrade at UBS - not sure it is going to work in this market, also the stocks have already seen a nice rally after JP Morgan upgrade. Still, if it gets going 5+% moves are very possible
* TEX upgrade at Credit Suisse - CAT and PH were also upgraded but TEX is the best one out of these. Should move regardless of the market
* BC upgrade by RBC
* STEC upgrade by B. Riley
* GNK & DSX downgrades at Stephens
These might work but don't have enough conviction with any of these.
* Airlines sector upgrade at UBS - not sure it is going to work in this market, also the stocks have already seen a nice rally after JP Morgan upgrade. Still, if it gets going 5+% moves are very possible
* TEX upgrade at Credit Suisse - CAT and PH were also upgraded but TEX is the best one out of these. Should move regardless of the market
* BC upgrade by RBC
* STEC upgrade by B. Riley
* GNK & DSX downgrades at Stephens
These might work but don't have enough conviction with any of these.
MannKind (NASDAQ:MNKD): Downgraded to Underperform at Oppenheimer
Oppenheimer is downgrading MannKind (NASDAQ:MNKD) to Underperform from Perform:
We had the opportunity to meet with MNKD management to discuss AFRESA and partnership developments. Importantly, (1) in contrast with investors who have bid up MNKD stock price, we do not believe an AFRESA partnership agreement will be secured by 3Q09. (2) In our view, MNKD's ~$60M financing in August suggests MNKD had to seek alternative sources of cash since near-term upfront partnership payments are unlikely. (3) We believe the FDA may require a 4-mos bioequivalence study comparing dreamboat and medtone inhalers, potentially delaying approval past the 1/16/10 PDUFA. (4) In our view, inclusion of AFRESA in metabolic advisory panel committee (12/15) may suggest FDA has concerns; however, AFRESA program may not be available for review by December.
Partnership Timing Slipping, May Not Surface During 2009. We believe a partnership around inhalable insulin product AFRESA is unlikely by 3Q09 and doubtful before approval. In our view, much of MNKD's recent stock move surrounded expectations for this partnership. As a reminder, MNKD had an internal goal of establishing a partnership by 3Q09.
Recent Cash Raise Suggests Partnership Unlikely. In our view, the fact that MNKD raised ~$60M in August suggests that management chose to access alternative sources of funding since the upfront cash from a partnership agreement likely would not be coming in 2009.
Additional Bioequivalence Study Could Delay Approval. Should MNKD launch AFRESA with the dreamboat inhaler, we believe the required ~4mos bioequivalence study would start in November, potentially delaying approval beyond the 1/16/10 PDUFA. We believe MNKD will launch the dreamboat inhaler, given insulin administration advantages, but FDA is likely to require bioequivalence at a minimum.
AFRESA Advisory Panel May Suggest FDA Has Concerns. We believe the FDA may review AFRESA at the Endocrinologic and Metabolic Drugs Advisory Committee meeting scheduled for 12/15 given safety concerns for inhaled insulin. Also, the safety bar for AFRESA is expected to be high, since millions of patients could be treated with the drug.
Action: I expect these comments to pressure the shares today. Nothing completely new as the reasons are basics for any bear case for the stock, but over the past few days seems like investors have less appetite for risks. I would expect the shares to fall below $9.50 and even more if the market stays red.
We had the opportunity to meet with MNKD management to discuss AFRESA and partnership developments. Importantly, (1) in contrast with investors who have bid up MNKD stock price, we do not believe an AFRESA partnership agreement will be secured by 3Q09. (2) In our view, MNKD's ~$60M financing in August suggests MNKD had to seek alternative sources of cash since near-term upfront partnership payments are unlikely. (3) We believe the FDA may require a 4-mos bioequivalence study comparing dreamboat and medtone inhalers, potentially delaying approval past the 1/16/10 PDUFA. (4) In our view, inclusion of AFRESA in metabolic advisory panel committee (12/15) may suggest FDA has concerns; however, AFRESA program may not be available for review by December.
Partnership Timing Slipping, May Not Surface During 2009. We believe a partnership around inhalable insulin product AFRESA is unlikely by 3Q09 and doubtful before approval. In our view, much of MNKD's recent stock move surrounded expectations for this partnership. As a reminder, MNKD had an internal goal of establishing a partnership by 3Q09.
Recent Cash Raise Suggests Partnership Unlikely. In our view, the fact that MNKD raised ~$60M in August suggests that management chose to access alternative sources of funding since the upfront cash from a partnership agreement likely would not be coming in 2009.
Additional Bioequivalence Study Could Delay Approval. Should MNKD launch AFRESA with the dreamboat inhaler, we believe the required ~4mos bioequivalence study would start in November, potentially delaying approval beyond the 1/16/10 PDUFA. We believe MNKD will launch the dreamboat inhaler, given insulin administration advantages, but FDA is likely to require bioequivalence at a minimum.
AFRESA Advisory Panel May Suggest FDA Has Concerns. We believe the FDA may review AFRESA at the Endocrinologic and Metabolic Drugs Advisory Committee meeting scheduled for 12/15 given safety concerns for inhaled insulin. Also, the safety bar for AFRESA is expected to be high, since millions of patients could be treated with the drug.
Action: I expect these comments to pressure the shares today. Nothing completely new as the reasons are basics for any bear case for the stock, but over the past few days seems like investors have less appetite for risks. I would expect the shares to fall below $9.50 and even more if the market stays red.
Thursday, September 24, 2009
VistaPrint (NASDAQ:VPRT): Upgraded to Buy from Hold at Needham
Needham is upgrading their rating on VistaPrint (NASDAQ:VPRT) to Buy from Hold:
After a recent meeting w/ mgmt and following a major update of our model to better reflect the launch of digital services and recent currency exchange rate changes, we are revising our forecasts, upgrading our recommendation to Buy from Hold, and initiating a 12-month price target of $60 (23% above current levels). For 1QFY10, our revenue and adj. EPS estimates increase to $142MM and $0.39, resp., and are above guidance and the consensus means. For 2QFY10 and beyond, our revenue estimates are above guidance and consensus but our EPS is at the low-end (or below is some cases) due to recent currency exchange rate changes. We believe business continues to perform at least in-line w/ expectations, w/ order growth >25% YoY, stable AOVs, and continued favorable customer acquisition cost trends. The company is also pursuing strategies to sustain growth, such as establishing a presence in the APAC region, infrastructure expansion in Europe, enhancing customer support resources, expanding its consumer/home offering, and rolling out a partnership w/ FedEx Office, among other things. Our model assumes digital services (i.e., websites and email marketing) could contribute $22MM in high-margin revenue in FY10. The strong U.S. Dollar (USD) on a YoY basis should still negatively impact revs and gross margins in 1QFY10, but likely not as much as contemplated in current guidance. For forecasting purposes, if we assume exchange rates remain stable at current levels, we estimate an F/X benefit to revenues but a slight negative to gross margins and EPS. However, we believe this possible F/X headwind will be more than offset by growth in digital services as well as other growth initiatives.
Action: This is a controversial name with a business model that has many doubters - just look at Citron's comments or 33,9% short interest. Yet the analyst community is overwhelminly positive on the stock with just about everybody having positive rating on the name. That makes me wonder if there is new longer-term money willing to come in at these levels.. even with new Street high estimates for current quarter from Needham.
The traders will definitely try to push this one as high short interest makes it an attractive target for a short squeeze. They will probably succeed initially and send the stock close to $50 and maybe higher. Just don't mistake it for real buying interest. Most likely the day highs will be made in the first 15-30 minutes and the stock will tick down afterwards - like GYMB did on Tuesday.
After a recent meeting w/ mgmt and following a major update of our model to better reflect the launch of digital services and recent currency exchange rate changes, we are revising our forecasts, upgrading our recommendation to Buy from Hold, and initiating a 12-month price target of $60 (23% above current levels). For 1QFY10, our revenue and adj. EPS estimates increase to $142MM and $0.39, resp., and are above guidance and the consensus means. For 2QFY10 and beyond, our revenue estimates are above guidance and consensus but our EPS is at the low-end (or below is some cases) due to recent currency exchange rate changes. We believe business continues to perform at least in-line w/ expectations, w/ order growth >25% YoY, stable AOVs, and continued favorable customer acquisition cost trends. The company is also pursuing strategies to sustain growth, such as establishing a presence in the APAC region, infrastructure expansion in Europe, enhancing customer support resources, expanding its consumer/home offering, and rolling out a partnership w/ FedEx Office, among other things. Our model assumes digital services (i.e., websites and email marketing) could contribute $22MM in high-margin revenue in FY10. The strong U.S. Dollar (USD) on a YoY basis should still negatively impact revs and gross margins in 1QFY10, but likely not as much as contemplated in current guidance. For forecasting purposes, if we assume exchange rates remain stable at current levels, we estimate an F/X benefit to revenues but a slight negative to gross margins and EPS. However, we believe this possible F/X headwind will be more than offset by growth in digital services as well as other growth initiatives.
Action: This is a controversial name with a business model that has many doubters - just look at Citron's comments or 33,9% short interest. Yet the analyst community is overwhelminly positive on the stock with just about everybody having positive rating on the name. That makes me wonder if there is new longer-term money willing to come in at these levels.. even with new Street high estimates for current quarter from Needham.
The traders will definitely try to push this one as high short interest makes it an attractive target for a short squeeze. They will probably succeed initially and send the stock close to $50 and maybe higher. Just don't mistake it for real buying interest. Most likely the day highs will be made in the first 15-30 minutes and the stock will tick down afterwards - like GYMB did on Tuesday.
Wednesday, September 23, 2009
Black & Decker (NYSE:BDK): Downgraded to Sell at Longbow
Longbow Research is downgrading Black & Decker (NYSE:BDK) to Sell with $35 price target:
We are downgrading BDK to SELL this morning on concerns over the divergence between recent share price valuations and what we perceive to be continuing weakness in underlying NA and European power tool fundamentals. We are reducing our earnings estimates to 4Q09E: $0.37 (-$0.06), FY09E: $1.66 (-$0.06) and FY10E: $1.90 (-$0.25). Our target price is $35 based on 18.5x FY10E EPS. The shares last traded at $35 on July 24, 2009.
Weak Power Tool Fundamentals in NA – As our survey research this month indicates, we do not believe the NA category is undergoing a significant recovery. Promotional activity remains high and appears necessary to induce sales volumes. While August volumes were up sequentially, we attribute this to (a) a cold, wet July throughout large portions of the U.S., and (b) pent-up demand from deferred purchases all summer. We are not seeing any convincing evidence of a recovery in construction activity sufficient to provoke tool purchases. In fact, STAFDA pro category tool dealers are telling us they are continuing to see yr/yr sales comparisons of negative 20%. While we expect a better 2010, we think the recovery will track a very gradual slope and fall below current Wall Street expectations.
Weak European Tool Fundamentals – The European market represents 25-30% of BDK revenues. From our survey research this month we know that the market looks slightly better than NA, but not by a meaningful amount. Mix remains weak and by our tally, could represent a couple of percentage points of revenue decline in 2H09. Retailers are being extremely cautious with their inventory investments and are gravitating towards stocking opening/value (read low margin) products. As we begin in September to compare with more ugly 2008 numbers in both Europe and NA, we will undoubtedly see the negative comp numbers reflect smaller magnitudes, but we do not believe we will see a significant upturn in tool demand until 2H10.
Raw Materials Cost Inflation – With various raw materials seeing price rallies since earlier this year, we expect BDK to feel increasing pressure on variable cost margins in 2010. This extends beyond the Power Tool business as both the locksets and the faucets businesses have large exposures to base metals such as copper ($2.85/lb, up 28% past 90 days), zinc ($0.87/lb, up 27% past 90 days) and nickel ($7.92/lb, up 18% past 90 days).
Low Probability Surrounding Fall 2009 Channel Fill – As evidenced by comments from a large home center at their analyst meeting held yesterday, retailers are still very cautious on their outlook for 2010. This will invariably be reflected in how they manage their inventory investments around key power tool sales events like Fathers Day and Christmas. In speaking with retailers, we continue to hear about how this year’s channel fill will be light, even by last year’s standards. We expect this will have an adverse impact on 4Q09 earnings performance and are reducing our 4Q earnings forecast accordingly.
Low Degree of Operating Leverage is a Negative in Recovery Phase of the Cycle – As the economy slowed, we saw the benefit of having sold off or closed manufacturing assets and out-sourced a big part of the company’s production. The company’s high variable cost model did not experience as rapid an EPS decline as its more capital intensive peers. But now we are looking forward to the recovery phase of the cycle and with variable costs proportionately higher (fixed costs proportionately lower), we expect to see less operating leverage, and therefore less EPS growth as industry volumes recover. Furthermore, if raw materials prices continue to rise and BDK is not successful in fully passing through increases, contribution margins will be even further reduced and the EPS recovery will be even further muted.
Valuation – As the accompanying chart illustrates, BDK is trading at a valuation well above the typical level seen at this point in the business cycle. At 25.5x FY10E EPS (a 55% premium to the S&P500 multiple), we must go back 16 years (1993) to find so rich a valuation. In the table below, we consider what BDK might earn over the next four years. If we take the 2013 forecast of $4.33 per share and apply a 14x P/E multiple, the implied January 1, 2013 share price should be $60.67. If we NPV this at 20% (our guess at what an investor would need as a minimum target return to invest over that period of time), we get $35 per share as a January 1, 2010 fair value. For those with lower hurdle rates, we present a 15% and a 10% discount scenario, none of which gets to the price of the shares on last night’s close.
Action: Just take a look at the chart of BDK. It has nearly doubled since the beginning of July. Now Longbow is saying that things are WORSE than expected. Not what you usually hear after such rally. I would expect these comments to pressure the shares today and possibly longer. I expect BDK to be a 5% decliner today so early shorts should be rewarded.
We are downgrading BDK to SELL this morning on concerns over the divergence between recent share price valuations and what we perceive to be continuing weakness in underlying NA and European power tool fundamentals. We are reducing our earnings estimates to 4Q09E: $0.37 (-$0.06), FY09E: $1.66 (-$0.06) and FY10E: $1.90 (-$0.25). Our target price is $35 based on 18.5x FY10E EPS. The shares last traded at $35 on July 24, 2009.
Weak Power Tool Fundamentals in NA – As our survey research this month indicates, we do not believe the NA category is undergoing a significant recovery. Promotional activity remains high and appears necessary to induce sales volumes. While August volumes were up sequentially, we attribute this to (a) a cold, wet July throughout large portions of the U.S., and (b) pent-up demand from deferred purchases all summer. We are not seeing any convincing evidence of a recovery in construction activity sufficient to provoke tool purchases. In fact, STAFDA pro category tool dealers are telling us they are continuing to see yr/yr sales comparisons of negative 20%. While we expect a better 2010, we think the recovery will track a very gradual slope and fall below current Wall Street expectations.
Weak European Tool Fundamentals – The European market represents 25-30% of BDK revenues. From our survey research this month we know that the market looks slightly better than NA, but not by a meaningful amount. Mix remains weak and by our tally, could represent a couple of percentage points of revenue decline in 2H09. Retailers are being extremely cautious with their inventory investments and are gravitating towards stocking opening/value (read low margin) products. As we begin in September to compare with more ugly 2008 numbers in both Europe and NA, we will undoubtedly see the negative comp numbers reflect smaller magnitudes, but we do not believe we will see a significant upturn in tool demand until 2H10.
Raw Materials Cost Inflation – With various raw materials seeing price rallies since earlier this year, we expect BDK to feel increasing pressure on variable cost margins in 2010. This extends beyond the Power Tool business as both the locksets and the faucets businesses have large exposures to base metals such as copper ($2.85/lb, up 28% past 90 days), zinc ($0.87/lb, up 27% past 90 days) and nickel ($7.92/lb, up 18% past 90 days).
Low Probability Surrounding Fall 2009 Channel Fill – As evidenced by comments from a large home center at their analyst meeting held yesterday, retailers are still very cautious on their outlook for 2010. This will invariably be reflected in how they manage their inventory investments around key power tool sales events like Fathers Day and Christmas. In speaking with retailers, we continue to hear about how this year’s channel fill will be light, even by last year’s standards. We expect this will have an adverse impact on 4Q09 earnings performance and are reducing our 4Q earnings forecast accordingly.
Low Degree of Operating Leverage is a Negative in Recovery Phase of the Cycle – As the economy slowed, we saw the benefit of having sold off or closed manufacturing assets and out-sourced a big part of the company’s production. The company’s high variable cost model did not experience as rapid an EPS decline as its more capital intensive peers. But now we are looking forward to the recovery phase of the cycle and with variable costs proportionately higher (fixed costs proportionately lower), we expect to see less operating leverage, and therefore less EPS growth as industry volumes recover. Furthermore, if raw materials prices continue to rise and BDK is not successful in fully passing through increases, contribution margins will be even further reduced and the EPS recovery will be even further muted.
Valuation – As the accompanying chart illustrates, BDK is trading at a valuation well above the typical level seen at this point in the business cycle. At 25.5x FY10E EPS (a 55% premium to the S&P500 multiple), we must go back 16 years (1993) to find so rich a valuation. In the table below, we consider what BDK might earn over the next four years. If we take the 2013 forecast of $4.33 per share and apply a 14x P/E multiple, the implied January 1, 2013 share price should be $60.67. If we NPV this at 20% (our guess at what an investor would need as a minimum target return to invest over that period of time), we get $35 per share as a January 1, 2010 fair value. For those with lower hurdle rates, we present a 15% and a 10% discount scenario, none of which gets to the price of the shares on last night’s close.
Action: Just take a look at the chart of BDK. It has nearly doubled since the beginning of July. Now Longbow is saying that things are WORSE than expected. Not what you usually hear after such rally. I would expect these comments to pressure the shares today and possibly longer. I expect BDK to be a 5% decliner today so early shorts should be rewarded.
U.S. Coal Sector Downgraded to Neutral from Overweight at Macquarie
Macquarie Group might not be very well known in the U.S., but they are making a big call on the U.S. coal sector, downgrading their sector weighting to Neutral from Overweight:
We are downgrading our ratings on the U.S. coal sector to Neutral from Overweight as we believe demand for seaborne metallurgical coal in China is slowing following discussions with Macquarie’s network of global physical coal traders and our commodity team. We have heard from Canadian producers that the Chinese have pushed back on deliveries and there appears to be an absence of new demand in Australia, suggesting that coking coal imports for September and October could fall sharply. The main export markets for U.S. coking coal of Europe and Brazil remain very weak and prices for spot met coal in the Atlantic Basin remain well below the Pacific Basin, limiting upside for U.S. companies.
If China really slows down, high-beta US coal stocks at risk. We have been very bullish on the US coal sector since June when global met coal and Chinese steel fundamentals were starting inflect to the upside and sentiment on the met coal market was generally bearish. The U.S. coal sector is up ~100% in the past two quarters and we see risk in the short run. We forecast Chinese imports to slow in 4Q owing to lower steel production and rising local mine supply which would be a negative catalyst for U.S. coal equities in our view. Also, thermal fundamentals continue to worsen and we expect producers to lower 2010 volume expectations this quarter offsetting much of the benefits of better coking coal fundamentals.
Increased Pacific met demand does not benefit US producers that much. US met coal producers ship very little met coal into Asian markets as the majority of tons are sold to US and Canadian customers. Brazil, and Europe account for 75% of U.S. met export volume and these markets remain extremely weak with excess inventory of coke and depressed steel mill operating rates. U.S. coal producers have not seen any major pick up in orders from Europe yet.
Met prices are soft in the US and Europe; thermal market remains very weak. The strength in met prices in the Pacific has not translated into higher European or US met prices. We believe prices for high-quality met are not higher than US$100/ton into Europe right now and are around US$95/ton in the US. The high-vol market remains oversupplied with weak prices near US$85/ton. US thermal prices continue to weaken and we expect rising inventories in the fall should drive new production cuts and reduced volume / price expectations for 2010.
Macquarie is lowering ratings on individual coal stocks as following:
Alpha Natural (NYSE:ANR) to Neutral from Outperform
CONSOL Energy (NYSE:CNX) to Neutral from Outperform
Massey Energy (NYSE:MEE) to Neutral from Outperform
Patriot Coal (NYSE:PCX) to Underperform from Outperform
Peabody Energy (NYSE:BTU) to Underperform from Outperform
Action: This is a call everyone invested in coal stocks should pay attention to. There hasn't been anything negative said on the sector recently, maybe only that valuations are getting a bit expensive. And now Macquarie is saying Chinese are pushing back deliveries & no new demand from Australia.. Wow. That doesn't sound too good, does it?
The only problem I have with this call is (potentially unfounded) relative lack of recognition of Macquarie among U.S. investors & traders. If this call was coming from a Tier-1, it would make headlines all over the media.. now it might go under the radar. Well, at least until some better known house comes out saying the same thing and everybody finds out that hey, there was somebody saying it before.
It also makes it difficult to make a call on the stocks. I would really like to go short in all the stocks mentioned, but it might take a bit too long until the word spreads. Maybe the best idea would be start with like 1/2 of position early on to be involved and add the rest after seeing this call making any headlines.
Update: Note that ANR & BTU were upgraded to Buy at Citigroup yesterday, getting only somewhat muted reaction in stock prices.
Update 2: FBR is downgrading WLT on valuation.
We are downgrading our ratings on the U.S. coal sector to Neutral from Overweight as we believe demand for seaborne metallurgical coal in China is slowing following discussions with Macquarie’s network of global physical coal traders and our commodity team. We have heard from Canadian producers that the Chinese have pushed back on deliveries and there appears to be an absence of new demand in Australia, suggesting that coking coal imports for September and October could fall sharply. The main export markets for U.S. coking coal of Europe and Brazil remain very weak and prices for spot met coal in the Atlantic Basin remain well below the Pacific Basin, limiting upside for U.S. companies.
If China really slows down, high-beta US coal stocks at risk. We have been very bullish on the US coal sector since June when global met coal and Chinese steel fundamentals were starting inflect to the upside and sentiment on the met coal market was generally bearish. The U.S. coal sector is up ~100% in the past two quarters and we see risk in the short run. We forecast Chinese imports to slow in 4Q owing to lower steel production and rising local mine supply which would be a negative catalyst for U.S. coal equities in our view. Also, thermal fundamentals continue to worsen and we expect producers to lower 2010 volume expectations this quarter offsetting much of the benefits of better coking coal fundamentals.
Increased Pacific met demand does not benefit US producers that much. US met coal producers ship very little met coal into Asian markets as the majority of tons are sold to US and Canadian customers. Brazil, and Europe account for 75% of U.S. met export volume and these markets remain extremely weak with excess inventory of coke and depressed steel mill operating rates. U.S. coal producers have not seen any major pick up in orders from Europe yet.
Met prices are soft in the US and Europe; thermal market remains very weak. The strength in met prices in the Pacific has not translated into higher European or US met prices. We believe prices for high-quality met are not higher than US$100/ton into Europe right now and are around US$95/ton in the US. The high-vol market remains oversupplied with weak prices near US$85/ton. US thermal prices continue to weaken and we expect rising inventories in the fall should drive new production cuts and reduced volume / price expectations for 2010.
Macquarie is lowering ratings on individual coal stocks as following:
Alpha Natural (NYSE:ANR) to Neutral from Outperform
CONSOL Energy (NYSE:CNX) to Neutral from Outperform
Massey Energy (NYSE:MEE) to Neutral from Outperform
Patriot Coal (NYSE:PCX) to Underperform from Outperform
Peabody Energy (NYSE:BTU) to Underperform from Outperform
Action: This is a call everyone invested in coal stocks should pay attention to. There hasn't been anything negative said on the sector recently, maybe only that valuations are getting a bit expensive. And now Macquarie is saying Chinese are pushing back deliveries & no new demand from Australia.. Wow. That doesn't sound too good, does it?
The only problem I have with this call is (potentially unfounded) relative lack of recognition of Macquarie among U.S. investors & traders. If this call was coming from a Tier-1, it would make headlines all over the media.. now it might go under the radar. Well, at least until some better known house comes out saying the same thing and everybody finds out that hey, there was somebody saying it before.
It also makes it difficult to make a call on the stocks. I would really like to go short in all the stocks mentioned, but it might take a bit too long until the word spreads. Maybe the best idea would be start with like 1/2 of position early on to be involved and add the rest after seeing this call making any headlines.
Update: Note that ANR & BTU were upgraded to Buy at Citigroup yesterday, getting only somewhat muted reaction in stock prices.
Update 2: FBR is downgrading WLT on valuation.
Tuesday, September 22, 2009
The Gymboree Corporation (NASDAQ:GYMB): Upgraded at FBR
FBR Capital is upgrading their rating on Gymboree (NASDAQ:GYMB) to Outperform with $59 target:
We are upgrading shares of GYMB based on (1) market share gains from compelling product, (2) best-in-breed management, (3) accelerating unit growth, (4) potential return to sustained positive comps, and (5) valuation still compelling in our opinion.
Gaining market share with target- and price-right product. Management discussed the popularity of “recent fashion,” and noted strong customer reception to product on its recent quarterly call. Store checks have shown strong reception to the value message, as well as compelling product. On the 2Q09 conference call, the company pointed out that it oversold in some basic denim, and it expects the reorders to arrive in November. We believe GYMB is gaining market share, as GapKids continues to undergo a consolidation into the Gap adult business, Talbots Kids has now closed, and Children’s Place (PLCE-Not Covered) struggles with the top line. With sharpened price points, but retaining the quality Gymboree is known for, we believe GYMB is now one of the “go to” brands for parents.
Let there be growth; GYMB joins the ranks of the “growth” stories in specialty retail. As we have discussed, there is a shrinking pool of square-footage growth stories in specialty apparel. As a result, investors have awarded this select group higher multiples for their potential organic growth. We have seen shares of companies with the promise of mid-single-digit square-footage growth bid up by investors. On the 2Q09 conference call, management alluded to three vehicles for growth going forward: Crazy 8, boys, and international. We believe the product looks significantly improved at Crazy 8, and management noted it expects the concept to break even in 3Q09. It expects to have 66 stores by the end of FY09 and plans to open a minimum of 50 stores in FY10, implying annual square-footage growth in the high-single to low-double-digit range. Additionally, management pointed to potential growth from international markets and Gymboree boys, suggesting that without square-footage growth, the company believes it can grow boys' sales by $100 million over time.
Despite the share runup, GYMB remains at a compelling valuation. Although we recognize that investors may shy away from a stock that has run significantly, we believe that there remains upside, as 3Q09 guidance appears conservative, and shares trade at 13.7x our FY10 estimates compared to the peer average 21.4x. Based on our belief in the product, management, and unit growth, we rate shares Outperform and recommend accumulation.
Action: It would be lovely, lovely upgrade.. if only the shares hadn't had such a wild run over the past 6 months. I still think the shares will catch a bid today due to combination of FBR comments, strength of overall market, continued momo and high short interest. How much will it run today? My guess would be 4-5%.
We are upgrading shares of GYMB based on (1) market share gains from compelling product, (2) best-in-breed management, (3) accelerating unit growth, (4) potential return to sustained positive comps, and (5) valuation still compelling in our opinion.
Gaining market share with target- and price-right product. Management discussed the popularity of “recent fashion,” and noted strong customer reception to product on its recent quarterly call. Store checks have shown strong reception to the value message, as well as compelling product. On the 2Q09 conference call, the company pointed out that it oversold in some basic denim, and it expects the reorders to arrive in November. We believe GYMB is gaining market share, as GapKids continues to undergo a consolidation into the Gap adult business, Talbots Kids has now closed, and Children’s Place (PLCE-Not Covered) struggles with the top line. With sharpened price points, but retaining the quality Gymboree is known for, we believe GYMB is now one of the “go to” brands for parents.
Let there be growth; GYMB joins the ranks of the “growth” stories in specialty retail. As we have discussed, there is a shrinking pool of square-footage growth stories in specialty apparel. As a result, investors have awarded this select group higher multiples for their potential organic growth. We have seen shares of companies with the promise of mid-single-digit square-footage growth bid up by investors. On the 2Q09 conference call, management alluded to three vehicles for growth going forward: Crazy 8, boys, and international. We believe the product looks significantly improved at Crazy 8, and management noted it expects the concept to break even in 3Q09. It expects to have 66 stores by the end of FY09 and plans to open a minimum of 50 stores in FY10, implying annual square-footage growth in the high-single to low-double-digit range. Additionally, management pointed to potential growth from international markets and Gymboree boys, suggesting that without square-footage growth, the company believes it can grow boys' sales by $100 million over time.
Despite the share runup, GYMB remains at a compelling valuation. Although we recognize that investors may shy away from a stock that has run significantly, we believe that there remains upside, as 3Q09 guidance appears conservative, and shares trade at 13.7x our FY10 estimates compared to the peer average 21.4x. Based on our belief in the product, management, and unit growth, we rate shares Outperform and recommend accumulation.
Action: It would be lovely, lovely upgrade.. if only the shares hadn't had such a wild run over the past 6 months. I still think the shares will catch a bid today due to combination of FBR comments, strength of overall market, continued momo and high short interest. How much will it run today? My guess would be 4-5%.
Macys (NYSE:M): Citigroup upgrading to Buy with $30 target
Citigroup is upgrading Macys (NYSE:M) to Buy from Hold and raising price tgt to $30 from $15:
Our Take — Following recent proprietary mtgs. with mgmt., we are upgrading M from a Hold (2H) to a Buy (1H) rating based on: 1) M’s ability to drive the topline as the My Macy’s localization initiative cont. to gain traction; 2) operating margin tailwinds from product cost deflation and Macy’s speed to market initiative, and 3) upside fr. current levels based on our $30 price target.
Rationale #1: My Macy’s to Fuel Topline — We are encouraged by the consistent, positive early results that Macy’s has reported from its 20 pilot markets since 4Q08, and believe that this localization initiative should lead to improved topline (and margin) trends ahead, particularly beginning in 2010.
Rationale #2: Margin Tailwinds Abound — Macy’s expects benefits from product cost deflation to be greater in ‘10 than in ‘09. Based on our proprietary analysis, cost deflation could boost gross margins by 50 bps next year! Also, Macy’s speed to market initiative is underway, and while Macy’s is a small step behind the competition, we view this as an investment positive, as a majority of the benefits are ahead of us.
Rationale #3: Upward EPS Revisions Warranted — Our previous EPS estimates and consensus are too low in light of the topline and operating margin drivers discussed above. We also view mgmt’s ‘09 guidance as conservative. As such, we raised our 2009-2011 EPS estimates and target price for M. Lastly, we raised our Sept. SSS estimate to (-4) to (-6)%, up from (-5) to (-7)% previously.
Action: This call has everything one might expect from an upgrade: real research by the analysts, near-term catalyst (higher Sept SSS estimate), strong case for longer-term upside, hefty price target - you name it.
I expect investors to take notice and come buying today, sending the shares close to $19 level today. It will be difficult to get fills at decent levels, so you probably need to pay up to get involved.
Our Take — Following recent proprietary mtgs. with mgmt., we are upgrading M from a Hold (2H) to a Buy (1H) rating based on: 1) M’s ability to drive the topline as the My Macy’s localization initiative cont. to gain traction; 2) operating margin tailwinds from product cost deflation and Macy’s speed to market initiative, and 3) upside fr. current levels based on our $30 price target.
Rationale #1: My Macy’s to Fuel Topline — We are encouraged by the consistent, positive early results that Macy’s has reported from its 20 pilot markets since 4Q08, and believe that this localization initiative should lead to improved topline (and margin) trends ahead, particularly beginning in 2010.
Rationale #2: Margin Tailwinds Abound — Macy’s expects benefits from product cost deflation to be greater in ‘10 than in ‘09. Based on our proprietary analysis, cost deflation could boost gross margins by 50 bps next year! Also, Macy’s speed to market initiative is underway, and while Macy’s is a small step behind the competition, we view this as an investment positive, as a majority of the benefits are ahead of us.
Rationale #3: Upward EPS Revisions Warranted — Our previous EPS estimates and consensus are too low in light of the topline and operating margin drivers discussed above. We also view mgmt’s ‘09 guidance as conservative. As such, we raised our 2009-2011 EPS estimates and target price for M. Lastly, we raised our Sept. SSS estimate to (-4) to (-6)%, up from (-5) to (-7)% previously.
Action: This call has everything one might expect from an upgrade: real research by the analysts, near-term catalyst (higher Sept SSS estimate), strong case for longer-term upside, hefty price target - you name it.
I expect investors to take notice and come buying today, sending the shares close to $19 level today. It will be difficult to get fills at decent levels, so you probably need to pay up to get involved.
Friday, September 18, 2009
Arena Pharmaceuticals (NASDAQ:ARNA): BLOSSOM Results Disappointing - Barclays
Barclays is the first one commenting on BLOSSOM results reported this morning by Arena Pharmaceuticals (NASDAQ:ARNA):
We are maintaining our 2-Equal Weight rating on ARNA following release of BLOSSOM results for lorcaserin in obesity. While the study met its 1ary endpoint results were disappointing relative to prior BLOOM results, well below the standard set by Vivus's Qnexa, at the bottom of the range for late stage candidates, only approximating regulatory requirements, of questionable clinical significance and unlikely to support partnership. We expect shares to pull back on these results
ARNA reported results today from the BLOSSOM study of lorcaserin in obesity. Results of the 4088 patient study suggest placebo adjusted weightloss of only 3.1% (5.9% vs 2.8%), below FDA guidance of 5% with categorical 5% weightloss in 47.2% vs 25% for placebo, in the range of regulatory guidance for approximate doubling. Results are below the 8% placebo adjusted weightloss with competitor Qnexa and no better than intensive lifestyle modification in a recent Contrave study
While topline safety appears relatively clean with no difference in valvulopathy and no apparent CNS AEs we would note a higher discontinuation rate for AEs at 7.2% vs 4.6%. We believe results are disappointing relative to expectations
Action: When you are developing a drug in a area with so many competitors then so-so results are not good enough. Despite meeting the primary endpoint these results should be considered as a disappointment and expect the stock to react accordingly today.
It is a short above $4 and I expect it to fall close to $3 level today.
We are maintaining our 2-Equal Weight rating on ARNA following release of BLOSSOM results for lorcaserin in obesity. While the study met its 1ary endpoint results were disappointing relative to prior BLOOM results, well below the standard set by Vivus's Qnexa, at the bottom of the range for late stage candidates, only approximating regulatory requirements, of questionable clinical significance and unlikely to support partnership. We expect shares to pull back on these results
ARNA reported results today from the BLOSSOM study of lorcaserin in obesity. Results of the 4088 patient study suggest placebo adjusted weightloss of only 3.1% (5.9% vs 2.8%), below FDA guidance of 5% with categorical 5% weightloss in 47.2% vs 25% for placebo, in the range of regulatory guidance for approximate doubling. Results are below the 8% placebo adjusted weightloss with competitor Qnexa and no better than intensive lifestyle modification in a recent Contrave study
While topline safety appears relatively clean with no difference in valvulopathy and no apparent CNS AEs we would note a higher discontinuation rate for AEs at 7.2% vs 4.6%. We believe results are disappointing relative to expectations
Action: When you are developing a drug in a area with so many competitors then so-so results are not good enough. Despite meeting the primary endpoint these results should be considered as a disappointment and expect the stock to react accordingly today.
It is a short above $4 and I expect it to fall close to $3 level today.
Thursday, September 17, 2009
BorgWarner (NYSE:BWA): Downgraded at KeyBanc
KeyBanc Capital Markets is downgrading BorgWarner (NYSE:BWA) to Hold from Buy:
We are downgrading our rating on BorgWarner Inc. (BWA-NYSE) to HOLD from BUY and lowering our earnings estimates to $0.07 from $0.27 for 2009 and to$1.35 from $1.58 for 2010 as we are incrementally concerned that: 1) BWA could report 3Q09 earnings below consensus expectations or that the Street may lower estimates prior to its earnings release, both of which could be a negative catalyst for the stock (we are lowering our 3Q09 estimate to $0.10 from $0.18; First Call mean is $0.13); 2) negative factors affecting 2Q09 and 3Q09 earnings could persist for several more quarters; and 3) potential weakness in stock price could present long-term investors with a more attractive entry point given the solid longer-term fundamentals at BWA.
We are incrementally concerned that BWA could report 3Q09 earnings below consensus expectations or that the Street may lower estimates prior to its earnings release, both of which could be a negative catalyst for the stock. As such, we are lowering our 3Q09 estimate to $0.10 from $0.18 (First Call Mean $0.13). We believe investors may be particularly sensitive to lowered expectations given disappointing 2Q09 results and the overall positive sentiment for the rest of the group.
We believe that the negative factors affecting 2Q09 and 3Q09 earnings (i.e., negative product mix, lower profitability in Europe, sluggish commercial vehicle sales, higher than expected interest and incentive compensation expense) could persist for several quarters before dissipating and becoming tailwinds in 2010.
We believe that potential weakness in stock price could present long-term investors with a more attractive entry point as we remain confident in solid longer-term fundamentals driven by an improving production environment, a strong new business backlog, and a robust product portfolio.
Action: Estimate cut below consensus might catch some investors as a surprise after all this excitement in the sector, sending the shares lower near-term.
I suspect BWA is going to trade around $32 in the pre-market and it should be considered as entry point for shorts. I expect shares to sell off after the open, possibly close to $31.
We are downgrading our rating on BorgWarner Inc. (BWA-NYSE) to HOLD from BUY and lowering our earnings estimates to $0.07 from $0.27 for 2009 and to$1.35 from $1.58 for 2010 as we are incrementally concerned that: 1) BWA could report 3Q09 earnings below consensus expectations or that the Street may lower estimates prior to its earnings release, both of which could be a negative catalyst for the stock (we are lowering our 3Q09 estimate to $0.10 from $0.18; First Call mean is $0.13); 2) negative factors affecting 2Q09 and 3Q09 earnings could persist for several more quarters; and 3) potential weakness in stock price could present long-term investors with a more attractive entry point given the solid longer-term fundamentals at BWA.
We are incrementally concerned that BWA could report 3Q09 earnings below consensus expectations or that the Street may lower estimates prior to its earnings release, both of which could be a negative catalyst for the stock. As such, we are lowering our 3Q09 estimate to $0.10 from $0.18 (First Call Mean $0.13). We believe investors may be particularly sensitive to lowered expectations given disappointing 2Q09 results and the overall positive sentiment for the rest of the group.
We believe that the negative factors affecting 2Q09 and 3Q09 earnings (i.e., negative product mix, lower profitability in Europe, sluggish commercial vehicle sales, higher than expected interest and incentive compensation expense) could persist for several quarters before dissipating and becoming tailwinds in 2010.
We believe that potential weakness in stock price could present long-term investors with a more attractive entry point as we remain confident in solid longer-term fundamentals driven by an improving production environment, a strong new business backlog, and a robust product portfolio.
Action: Estimate cut below consensus might catch some investors as a surprise after all this excitement in the sector, sending the shares lower near-term.
I suspect BWA is going to trade around $32 in the pre-market and it should be considered as entry point for shorts. I expect shares to sell off after the open, possibly close to $31.
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