August 25, 2009: Morning Call

August 25, 2009: Morning Call

Fair Value: SP500 – 1024.34; NDX: 1634.51; DOW: 9496.84

Technical Levels:

SPX: 875-880, 910, 953, 986 support/ 1044 resistance

Events:

Pre-market EPS: BIG (.30/1.0B; BKC (.33/633.4M); CHS (.10/414.3M); MDT(.78/3.8B); SAFM (1.76/475.6M); SPLS (.16/5.5B)
09:00: S&P/Case Shiller Home Price Index (June): -16.4% YoY
10:00: US Consumer Confidence (August): 48.0
10:00: Richmond Fed Manufacturing Index (August): 14.0
10:00: US House Price Index (June): 0.4%
16:30: API Crude Oil and Gasoline Inventories
Post-market EPS: BCSI (.22/116.3M); DY (.15/273.8M)


Foreign Market Summary/Key Macro News/Commentary:

The S&P and NASDAQ futures are both trading 3 points above fair value at 7:45am ET. The futures are at the highs of the overnight session following news that President Obama will nominate Ben Bernanke for another term as Chairman of the Federal Reserve. Asian markets closed lower (Japan down 0.79%, Hong Kong down 0.49%, Australia down 0.46%, Shanghai down 2.6%, India up 0.38%). Bank stocks underperformed after Chinese Premier Wen said the economy faces “uncertainties.” European markets are down 0.20%, paring losses of nearly 1%. Germany Q2 final GDP (7.1%) y/y vs prelim (7.1%). UK British Bankers Assn reports UK Jul mortgage approvals 38,181 vs 35.564 in Jun and up +76.7% y/y. Q-Cells (QCE.GR) downgraded to neutral at Credit Suisse.

Research Calls/Market Moving News:

WCRX (20.41): WSJ discusses Monday's nearly 30% jump in shares of Warner Chilcott: In a "Heard on the Street" column, the Journal notes that shares of Warner Chilcott rallied nearly 30% on Monday after it announced that it will pay $3.1B for P&G's (PG) prescription-drug division. According to the article, there are a number of positive factors surrounding the deal, particularly Warner's ability to secure full-financing for the deal from a syndicate of banks, a dynamic which represents a significant change from earlier this year when financing conditions were difficult even for drug companies with strong credit ratings. The Journal also highlights how Warner benefits from lower tax rates in Ireland and Puerto Rick, and expects some of the P&G assets to receive the same treatment. The article goes on to point out that Warner has a favorable record when it comes to extending patents on drugs. While not mentioned in the column, StreetAccount notes that the $3.1B price tag also came in at the low end of Bernstein's $3B-$4B valuation range.

WCRX (20.41): Warner Chilcott upgraded to buy from hold at Jefferies: The firm believes the acquisition of P&G Pharma diversifies and strengthens the company's portfolio.

BLK (204.80): Pali Capital downgrades BLK to neutral. “We are downgrading BLK to Neutral from Buy. Since our upgrade on May 22, 2009, BLK is up 44% compared to 15% for the broader market and an average of 31% for the AUM group. We remain bullish on Company prospects but have a hard time generating estimates that can support 15-20% upside from current levels. Our revised 2010 estimate of $9.83 (consensus of $8.84) builds in solid growth for both BLK standalone and BGI. We note our estimates assume average qtrly inflow of $61bn for BGI through 2010 compared to a record actual first half pace of $54 billion in 2009. We assume BGI AUM increases 38% by the end of 2010, compared to a CAGR of 19% from 1995 to 2007. In a nutshell, BGI needs to do materially better than our already constructive outlook and the markets need to remain robust for several qtrs. That risk/reward dynamic warrants a Neutral rating. In accordance with an improvement in markets, we are raising our 2009 and 2010 EPS estimates to $6.56 and $9.83 from $6.53 and $9.10, previously.

AAPL (169.06): Apple mentioned positively at BMO Capital: The firm says demand for the iPhone remains strong following the 3GS launch with the 16GB model selling the best at 60% of mix with 8GB and 32GB at roughly 20% each. BMO believes their gross margin assumption of 34.8% for the Sept. quarter is reasonable if not conservative with upside to the mid 35% level. No change to estimates. Target remains $185.

AAPL (169.06): CEO Steve Jobs focusing on Apple's new tablet device – WSJ: Without giving details on the device or when it might be released, people familiar with the situation say Jobs is intensely scrutinizing the work the company is doing on the tablet, particularly with respect to its advertising and marketing strategy. In an email, Jobs denies what one source says, that employees who had grown used to a degree of freedom while he was on leave have been disturbed by the level of control he is asserting. People close to the company say Jobs remains thin since his liver transplant, but his health has improved significantly.

GS (162.58): Securities regulators examining Goldman Sachs's trading tips – WSJ: People familiar with the matter say examiners at the Financial Regulatory Authority and SEC intend to ask the bank for more information on its weekly trading huddles. Recall the Journal reported yesterday that Goldman uses the huddles to offer choice trading tips to clients it chooses to. The bank has not been accused of violating any securities laws.

GOOG (468.73): Google upgraded to buy from source of funds at ThinkEquity: Target increased to $550 from $400. We downgraded GOOG shares to Source of Funds on February 17, 2009, based on our view that consensus estimates were too high and that low single-digit revenue growth in 2Q and 3Q09 would cause significant multiple contraction. While we believe our fundamental thesis played out as we expected, we clearly got the stock wrong. Given that 2Q is behind us and that we expect an "in-line" 3Q, we upgrade GOOG shares and raise our price target to $550 due to our belief that Google is likely to outperform as the economic cycle turns. KEY POINTS: Several Projected Catalysts Lead To Our Upgrade: There are several reasons for our upgrade today: 1) Our estimates are now meaningfully above the consensus (see Exhibit 1), whereas, in February, they were significantly below the consensus. The Street estimates have come down materially over the past two quarters, and we now expect Google to meet or beat consensus estimates for the next several quarters. 2) We believe Google is the best-positioned company in our universe to outperform when the economy turns. Google has delivered incremental margins higher than 100% for two quarters in a row, but has done so against a decelerating revenue base, which we believe has muted the EPS impact. When revenue re-accelerates, the company's massive incremental margins should drive significant earnings (and FCF) outperformance for a few quarters until Google cranks up its investments to prepare for renewed growth. 3) We believe that there are a number of fundamental catalysts that could contribute to top-line outperformance, including rising revenue per click in the core search business, the launch of DoubleClick AdX 2.0 (which should improve eCPMs across the AFC network), and increasing demand for video advertising opportunities (where YouTube is the leading video destination in the world). 4) The significant foreign exchange headwind should be more muted in 2H09 and potentially benefit Google during 2010.”

GOOG (468.73): WSJ is cautious on Google: In a "Heard on the Street" column, the Journal wonders if Google is the next eBay (EBAY), highlighting some worrisome parallels between Google today and eBay in 2005-06, when the online auction company's growth was stalling. The article notes that like Skype, YouTube may not be able to monetize its high user traffic. In addition, Android's ability to help Google expand in the mobile advertising market remains unproven, while neither Apple (AAPL) nor Research in Motion (RIMM), which dominate the smartphone market, use the operating system. The Journal also notes that while investors are waiting for some of Google's new initiatives to gain traction, growth is slowing in the core paid-search advertising business. The article goes on to point out that the stock is fetching 25x 2009 consensus earnings (including the cost of stock options), despite the fact that Google's medium-term revenue growth is likely to fall toward the 10% level."

STP (14.79): Suntech Power selling solar panels in US for less than cost – NYT: In an interview, CEO Shi Zhengrong says the company is looking to build market share. Any antidumping case seems unlikely to succeed, because it would rely on showing that American companies were losing money as a result. Industry leader First Solar (FSLR) is profitable. The article as a whole looks at how Chinese companies are moving quickly to dominate green energy. Suntech has encouraged its US-based executives to take top positions in industry groups to prevent their acting to stir up opposition to imports. Backed by generous government support, low-interest loans, and substantially cheaper labor than is available in the US, they plan to build factories in the US to avoid the perils protectionist legislation might pose. A Suntech executive says the company will announce its plans to build an American plant in the next month or two.

WSJ warns about Indian banks: A "Heard on the Street" column says Indian banks are big buyers of government debt, which is expanding in quantity at pace. Rising interest rates will mean bond prices decline, and treasury gains made up more than 35% of pretax profits for the quarter ended in June at ICICI Bank (ICICIBC.IN) and others. The higher rates will also threaten loan growth and asset quality as customers may have trouble servicing the debt. In summary, though banks have been outperforming the Indian market recently, the column recommends avoiding the stocks for now.

MA (204.23); V (67.95): Jefferies initiates MA, V: MasterCard (MA) initiated buy with $240 target. Visa (V) initiated buy with $80 target.