May 26, 2009: Morning Call

May 26, 2009: Morning Call

Fair Value: SP500 – 885.92; NDX: 1363.10; DOW: 8267.86

Technical Levels:

SPX: 765, 788, 832, 875-880 support/ 935-943 resistance

Events:

Pre-market EPS: BMO (.86/2.67B); CSIQ (-.26/53.8M)
09:00: S&P/CaseShiller Home Price Index (March): -18.4%
10:00: US Consumer Confidence (May): 42.6
10:00: Richmond Fed Manufacturing Index (May): -6
10:30: Dallas Fed Manufacturing Index (May): -22.1%
11:30: Treasury Auctions 31 billion in 3-Month and 31 billion in 6-Month Bills
13:00: Treasury Auctions 40 billion in 2-Year Notes
17:00: ABC Consumer Confidence
Post-market EPS: BGP (-.50/637.3M); DCI (.31/440.9M); TTWO (-.14/214.8M)


Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 5 points below fair value while the NASDAQ futures are trading 15 points below fair value. Global markets are under pressure after North Korea conducted an underground nuclear test and fired two short-range missiles overnight. Asian markets closed lower with South Korea down 2% following the North Korea’s nuclear test (Japan down 0.40%, Hong Kong down 0.76%, Australia up 1.35%, Shanghai down 1.2%, South Korea down 2.08%, India down 2.3%). The Australian Securities & Investments Commission lifted a ban on covered short-selling of financial stocks Monday, ahead of a previously scheduled expiration on 31-May. South Korean authorities also recently said their ban on shorting non-financial stocks would be lifted on 1-June, although the ban on short-selling financials will still be in place. In Taiwan, PC brands Acer (2353.TT) and Asustek (2357.TT) climbed after the companies were included in a Chinese stimulus package that allows them to sell computers in China. European markets are down 1.0% to 1.5% with Material, Banks, and Insurance sectors among the weakest. Retail and Telecom sectors are outperforming.


Research Calls/Market Moving News:

FSLR (191.72): Friedman Billings downgrades FSLR to underperform due to inexpensive poly prices relative to solar wafers. FSLR shares are trading down nearly 9 dollars in the pre-market and are the leading point decliner in early trading. “We are lowering our estimates and are downgrading FSLR from Market Perform to Underperform. Recent checks suggest that with poly currently priced at $65/kg in the spot market (and accordingly, solar wafers are priced at $3.5 and below/piece, resulting in si-based modules as low as US$2.10/watt), some customers in Germany are already considering switching from FSLR’s to si-based. We believe we have learned of one top customer of FSLR that has already switched to a si-based module vendor for one of its projects currently under construction. Additionally, our meeting with KfW yesterday indicated that although 80%-plus of projects in CY08 were based on FSLR’s TF modules, the current mix of the backlog at KfW is only 55% FSLR's TF and 45% si-based. We therefore find increased risk to ASP assumptions, a possible shortfall to shipment assumptions, and increased possibilities that FSLR could take ownership of more projects as a means to drive demand (which consequently could complicate revenue recognition like the already announced 50MW projects in Germany). Thus, as much as we wanted to become more constructive by now, realities in the field, combined with inflated expectations/consensus estimates, have led us to change our rating again and become incrementally more “bearish” on the name. Despite the company's CY09 revenue guidance of $1.9B to $2.0B, we are lowering our revenue/EPS from $1,900M/$6.31 to $1,851M/$6.11. Our CY10 estimates have also changed from $2,029M/$5.08 to $2,002M/$5.04. Our price target of $110.00 remains unchanged, which is based on 5x EV/sales and 12x EV/EBITDA. Such multiples compare to the current peer group (SPWRA, STP, TSL, YGE) average of 1.5x EV/sales and 8x EV/EBITDA.”

FSLR (191.72): Barron's Follow Up says First Solar (FSLR) could see pressure this week: The Intersolar Trade Show is this week in Munich. Contracts will be negotiated and some have said they will stop using First Solar's thin film panels if the falling cost of refined silicon keeps bringing down the price of rivals' products. FSLR could see its shares fall by 50% as a result. The estate of John T. Walton, who bankrolled the company, has been a big seller during the run up in the share price, selling about 10% of its holdings

AAPL (122.50): Apple upgraded to overweight from equal-weight at Morgan Stanley: Target increased to $180 from $105. The firm expects to see upside to earnings fueled by the iPhone.

RIMM (72.03): BMO capital raises estimates based on higher device unit shipments and lower operating expenses. Price target is increased to 82 from 72. “We believe the May quarter is tracking well with upside tension to our 7.8 million device shipment. Moreover, we are raising our FY2010 and FY2011 device unit shipment forecasts, as we believe our assumptions were too conservative. We have assumed ~250 basis points (bp) gross margin (GM) decline over the next few quarters to account for mix and potential pricing pressure, including Apple. Our target price increases to $82 from $72 based on our estimate change and a higher earnings multiple. We are raising our target multiple range to 18x- 20x from 16x-17x, reflecting both higher growth rates and greater conviction in our estimates.”

PBR (40.58): Petrobras added to Conviction Buy List at Goldman Sachs

CSIQ (10.01): Canadian Solar reports Q1 EPS ($0.10) vs Reuters ($0.25): First Call ($0.26). Company reports revenues of $49.5M vs Reuters $54.1M. Shipments for Q1 were appx 18M; adjusted gross margin 16.54% Q2 shipments guided to be significantly higher than Q1. F09 shipments guided to range 200-220 MW, below prior guidance of 300-350 MW, with previously issued net revenue outlook adjusted accordingly. CSIQ says recent inventory clearance efforts by some of its competitors have resulted in declining module ASPs, which may cause delays in project purchase decisions by customers, and that these issues may ultimately lead to some order reductions or push-outs into 2010.

ANR (25.85); PCX (8.82): Morgan Stanley downgrades ANR, PCX: Alpha Natural Resources (ANR) downgraded to equal-weight from overweight; target is $30. Patriot Coal (PCX) downgraded to underweight from equal-weight.

BAC (11.07): BAC upgraded to market perform from underperform at Friedman Billings Ramsey: "We are upgrading Bank of America to Market Perform (from Underperform) given that the first half of its capital plan has been successfully completed and its shares trade below our $12 price target. We see less risk of near-term dilution given the new capital and apparent strong demand for BAC's new shares. We remain very cautious on the company longer term, given rapidly rising credit losses, which totaled $6.9 billion in 1Q09 ($9.1 billion on a managed basis). If losses continue to grow at a 25% sequential pace, they could exceed the company's "core" pre-provision, pretax earnings power within a few quarters. Further, we expect that asset sales, dilution, higher regulation (including FDIC insurance assessments and new credit card regulations) will all reduce BAC's "normalized" earnings power. We reiterate our $12 price target, equal to 1.1x 1Q09 tangible book value. The recent capital raise and CCB sale are neutral to tangible book, but further asset sales and/or earnings above PPNR may be slightly
accretive.”

TGT (40.74): Barron's says Bill Ackman's Target campaign is off-target; Mr. Ackman responds: The belief is that Target will be able to fend off Ackman because of the company's strong standing in the investor community and Ackman's limited stake. The company calls the plan to separate the real estate holdings risky and speculative. Barron's says his plan could be one of the worst conceived efforts by an activist investor in recent years. One analyst called the company the best alternative out there to shopping at Walmart. Positive mentions of the earnings and revenue growth and bulls say the shares could hit $50 next year. Ackman is seeking to replace the board, not management, saying the board is cozy and insular. Two real estate experts doubted the benefits of Ackman's plans to create a single tenant REIT. This seems to be a time to buy Target shares and the company remains one of the best-run retailers in the U.S. Mr. Ackman responded to this article with a press release saying the article was riddled with materially false and misleading statements. He notes the lack of willingness by the nominating committee to meet with the candidates he proposed for the board or to explain its rejection of those candidates. The board has extended the term limits from the founding family's 12 years to the current 20 years. The company has adopted a staggered board and combined the roles of CEO and chairman. He points out that the REIT proposal is for the land only and not the Target stores, allowing the company to make any and all renovations it desires, one of the objections to the plan in the article.