Under The Radar News - Wednesday

by: SA Eli Hoffmann
  • Sell-side mandate. Merrill Lynch's (MER) new "dispersion guidelines" will require equity analysts to rate at least 20% of the companies they cover Sell (or Underperform as Merrill calls it), about four times the Wall Street average. Buy ratings will be capped at 70% of an analyst's coverage. "Anybody can find good stuff to buy. It's the sell research people pay for," one money manager quipped. Another thinks Merrill's trying to lure lucrative hedge fund managers: "It's not so much throwing in the towel on the long bias they've had, but probably trying to go after the customer base that has generated the most commissions, and that's the hedge funds," he says.
  • "A funny thing happened to the economy on its way to recession: It's taken a detour." That's what a growing number of economists polled by the WSJ seem to think. Wachovia now gives recession 45% odds, down from 90% last month. Many economists now think the government's initial Q1 GDP estimate of 0.6% will be revised upward. Even previously squeamish Alan Greenspan and George Soros are starting to change their tune.
  • Stocks coming back into style. A Merrill Lynch survey shows investors are warming back up to equities. Only 5% of money managers say they're underweight in stocks, down from 13% a month ago and 23% in March.
  • BHP to ignore China antitrust issue. BHP (NYSE:BHP) has no intention of discussing its potential acquisition of Rio Tinto (RTP) with Chinese regulatory authorities. Chinese antitrust regulation goes live in August, but the law can be applied retrospectively.
  • Next year: Time travel. Sources say a new iPhone to be released in Switzerland this summer will feature GPS, Video Conferencing and Mobile TV.
  • Thunder details come to light. Research in Motion's (RIMM) new touchscreen BlackBerry Thunder, or BlackBerry 9500, will launch in Q3 with a full-fledged touchscreen, four keys, and no slide-out keyboard. Thunder will be a "worldwide lifetime exclusive" on Verizon (NYSE:VZ) and Vodafone (NASDAQ:VOD).
  • "Don't get burned." Stock Lemon notes American Superconductor (NASDAQ:AMSC) shares are up 25% after reporting higher top-line revenue earlier this week. But the investigative investor claims AMSC's revenue gains are not based on "legitimate arms-length transactions." Andrew Left is also concerned about furious insider selling.
  • Social-networking ads' slow growth. Internet advertising research firm eMarketer cut its ad spending estimates for Facebook, MySpace (NASDAQ:NWS) and other social-networking sites, raising further concerns over whether social-networking websites can attract major ad dollars. It now says U.S. advertisers will spend $1.4B on social-networking in 2008, down from a previous forecast of $1.6B. Facebook ad revenue will total $265M, down from a previous forecast of $305M, and MySpace will bring in $775M, down from $850M, it says. Advertisers have yet to figure out how to attack the diverse usergroups that frequent the sites.
  • China quake impact on PC supply muted. A recent large earthquake in the Sichuan province of China caused a work stoppage at Intel's (NASDAQ:INTC) packaging and testing plant, but the company says the long-term effect on its supply chain should be minimal. Small PC and motherboard makers are more likely to be hit with supply shortages than tier-one firms, who have priority. Meanwhile tier-two vendors are ordering CPUs from VIA to outfit their low-cost PCs due to a pre-existing shortage in Intel's Atom lineup.
  • Brokerage bear. Goldman says Lehman (LEH) will lose $0.20/share in Q2, down from a previous estimate of a $1.35/share profit. Analyst William Tanona also slashed estimates for Morgan Stanley (NYSE:MS) and Bear Stearns (NYSE:BSC). Analysts dissing I-banks is nothing new, but Tanona's the first to say Lehman will not make a profit this quarter.
  • IT M&A: More to come. Hewlett-Packard's (NYSE:HPQ) $14B deal for Electronic Data Systems (NASDAQ:EDS) has spawned tech sector merger talk. Likely targets include Infosys (NASDAQ:INFY), Computer Sciences (NYSE:CSC), and Accenture (NYSE:ACN).
  • Heartwarming stock. Barron's thinks shares of Edwards Lifesciences (NYSE:EW), already up 21% YTD, have more room to grow on the companies new heart valve, Sapien. Doctors can implant the valve without opening the patient's chest, and it's selling strongly in Europe. "Edwards is changing from an afterthought to a top-of-the-line investment," says portfolio manager Eric Crigler. "Sapien is one of the few breakthrough products in the medical technology industry's pipeline right now." Shares could climb another 25% in the next 12 months.
  • Toll would consider merger of equals. Asked whether Toll Brothers (NYSE:TOL) has considered a "merger of equals," CEO Robert Toll said: "We have. We haven't spent a lot of time on it. We've dipped our toes in the water. Chatted it up a little bit. So far we're very happy where we are. It's not ruled out."
  • Choppy shutdown. Boeing (NYSE:BA) temporarily shuttered a helicopter production line for several hours due to possible irregularities.
  • Not all money is created equal. Royal Bank of Scotland's (NYSE:RBS) will not allow private-equity firms to bid on the auction of its insurance business, despite interest from a number of firms including KKR, Blackstone (NYSE:BX) and Apax Partners.
  • Garbage in... Clean Tech Biofuels (OTCPK:CLTH) is developing a process that takes municipal solid waste and produces ethanol. It hopes to open a commercial plant within two years.
  • No... yes... maybe. After yesterday denying merger discussions with Virgin Mobile USA (VM), today a spokeswoman for SK Telecom (NYSE:SKM) backtracked. "SK Telecom is currently exploring strategic opportunities for Helio and has engaged in preliminary discussions with Virgin Mobile USA with respect to such an opportunity."
  • Costly Cheese Whiz. Kraft Foods (KFT) CEO Irene Rosenfeld says the firm will be forced to raise prices this year to offset increasing commodity costs.
  • Pervasive pill-taking. More than half of all Americans now take prescription drugs regularly. Good news for pharma companies and health benefit managers like Medco Health Solutions (NYSE:MHS). Bad news for almost everyone else.
  • RV makers getting squeezed. The housing crisis and soaring gas prices have taken a toll on the $15B RV industry. Sales fell 12% last year, and are expected to drop another 14% this year, bringing sales to their lowest level since 2001. Companies such as Coachman (NASDAQ:COA) and Fleetwood (FLE) appear to be getting desperate: Coachman borrowed against the life insurance policies of its employees, and Fleetwood sold its headquarters and wants to sell other properties.
  • Ford Canada labor deal shunned by GM. Chrysler called Ford's (NYSE:F) deal with the CAW too rich. Chrysler and GM (NYSE:GM) say they won't match it.
  • LBO debt buybacks prompt review. Private equity firms are buying back their own debt at discount prices, prompting the European Loan Market Association to probe the recent trend and ensure all lenders are getting a fair opportunity to sell their debt.
  • Goldman pulls out of RadioShack. Goldman Sachs (NYSE:GS) Asset Management reduced its stake in RadioShack (NYSE:RSH) to less than 1% from 7.4%. The unit had been RadioShack's number-four shareholder. Shares are down 50% over the past 12 months. Apparently Goldman doesn't think they're a bargain.