PepsiCo (NYSE: PEP) was upgraded to Buy from Hold at Deutsche Bank.
Fortress (NYSE: FIG) was upgraded at Citigroup to Hold from Sell.
Prudential (NYSE: PUK) was lifted to Overweight from Neutral at JP Morgan.
Keefe Bruyette upgraded Franklin Resources (NYSE: BEN) to Outperform from Market Perform and added shares to their Best Ideas List on valuation as they see an attractive risk/reward at current levels.
UBS upgraded ASML Holding (NASDAQ: ASML) to Buy from Neutral on valuation as they believe the company remains a market leader.
Oppenheimer raised Seattle Genetics (NASDAQ: SGEN) to Outperform from Perform on valuation following the recent weakness as they expect positive clinical news flow beginning in December.
Analyst downgrades:
UBS downgraded U.S. Steel (NYSE: X) to Sell from Buy and lowered its target to $30 from $60 citing deteriorating U.S. conditions and concerns about the company's high fixed costs in a falling steel price environment.
Royal Dutch Shell (NYSE: RDS.A) was downgraded to Underperform from Neutral at Credit Suisse.
China Unicom (NYSE: CHU) was lowered to Underweight from Neutral at JP Morgan.
Even with the huge federal government buyout, cash is still in short supply that the Federal Reserve recently loosened the restrictions on private equity firms in terms of investment stakes in banks.
In light of this, one of the top private equity operators, Fortress Investment Group LLC (NYSE: FIG), is eliminating its Q3 dividend payment of $0.225 per share. Basically, the firm wants as much capital as possible to capitalize on the opportunities -- Fortress has about $300 million in cash. The CEO, Wesley Edens, said he wants to put money into banks, insurance companies and asset management operations.
In other words, this may be an attempt to reformulate the structure of Fortress's private equity structure, making it look more like a traditional financial services firm. It certainly helps that Fortress has a lot of capital to put to work.
However, such investments can be volatile and take several years to come to fruition. Then again, the purpose of private equity is to seek out long-term returns, right?
Merrill upgraded shares of AstraZeneca (NYSE: AZN) to Neutral from Underperform to reflect the company's pipeline momentum and lack of negative catalysts.
Keefe Bruyette upgraded Deutsche Bank (NYSE: DB) to Outperform from Market Perform on valuation as they believe DB should trade at a higher multiple.
Merrill cut Novo Nordisk (NYSE: NVO) to Underperform from Neutral as the firm sees better opportunities elsewhere in the sector.
Merriman downgraded Rackable Systems (NASDAQ: RACK) to Neutral from Buy following the company's mixed Q2 results to reflect its customer concentration and fluctuating margins.
Janus Capital (NYSE: JNS) was downgraded at JP Morgan to Underweight from Neutral.
Fortress (NYSE: FIG) was cut to Sell from Hold at Citigroup.
Analyst initiations:
UBS believes Apple (NASDAQ: AAPL) has a competitive advantage and their checks indicate new Macs, new iPhone colors and potentially new iPods may come early on in the second half of 2008. The firm initiated shares with a Buy rating and $195 target. UBS also initiated Dell Inc. (NASDAQ: DELL) and Hewlett-Packard (NYSE: HPQ) at Neutral.
KeyBanc initiated Bed Bath & Beyond (NASDAQ: BBBY) with an Underweight rating and $25 target based on slowing core growth at Bed Bath and likely margin erosion from the ramp in growth at Christmas Tree Shops and buybuy Baby.
Infineon (NYSE: IFX) was initiated with a Buy rating at Deutsche Bank.
TheStreet.com's Jim Cramer says as long as there are other buyers of the paper, look for other similar deals.
Merrill's (NYSE: MER) (Cramer's Take) deal with Lone Star gives the first real stab of the private market value of this paper, 22 cents on the dollar. But when you add in the financing you can argue that it is about half that.
Why so low? Because even after a year and a half of stress, we still can't publicly value this stuff.
Remember the deal with Lone Star is a private one, where the investors have to wait five years for the paper to mature. We don't really know what a CDO is worth, you just know what they may have paid.
This is despite the fact that for years now, this stuff has existed, no one has come out and said "this CDO has a lot of Florida, so it is bad," or "this piece of paper has a 90% default rate," or "this debt is hindered by bad HELOC."
Without that info, we can't price it. Lone Star knows more than most, but basically had to put up very little. In this deal, Merrill said "here, we will pay you to take these off our hands."
TheStreet.com's Jim Cramer says KKR will join the list of buyout firms that fleece the small investor by going public.
Just what we need, a private-equity firm to go public. That worked just great with Fortress Investment (NYSE: FIG) (Cramer's Take), and it was terrific with Blackstone (NYSE: BX) (Cramer's Take). At least this one is some sort of reverse merger that might not inflict too much pain on the public.
Of course, folks in this business are displaying their usual lack of shame. It would be an excellent time for them to have a good reason beyond employee retention; I mean if you are making all of that money, what's the issue with retention? It would also be terrific if they were doing well, but there hasn't been a deal in so long that it would be a bit of an oddity if they were doing anything other than making a lot of fees.
But Kohlberg Kravis Roberts is a storied lot, so I figure the public will lap it up and all will be well until the losses start.
Or maybe this will be the one that's in the blue moon and the public will not be pants'd by the really smart bankers.
Barnes & Noble Inc (NYSE: BKS) is considering a bid for rival bookseller Borders Group Inc (NYSE: BGP), the Wall Street Journal reported, a move which would allow Barnes & Noble to improve profits and reduce costs. Antitrust issues could prevent a deal.
The Wall Street Journal also reported that Carl Icahn's effort to remove Yahoo! Inc's (NASDAQ: YHOO) board has picked up new supporters, including T. Boone Pickens, who acquired a 0.75% stake. Some Yahoo shareholders believe it is still too early to predict whether Icahn will be able to carry July 3's shareholder vote.
A Financial Times investigation discovered that Moody's Corporation (NYSE: MCO) incorrectly awarded top ratings to billions of dollars to debt products due to an error in its computer models. Moody's said it is in the process of "conducting a thorough review" of the rating of the constant proportion debt obligations, which should have been up to four notches lower.
OTHER PAPERS:
According to the people briefed on the matter, the New York Times reported that the buyout of Penn National Gaming Inc (NASDAQ: PENN) by Fortress Investment Group (FIG) and Centerbridge Parters may involve revised terms. The sources said the negotiations may "delay or even imperil" the deal.
Apollo Management, which is one of the largest private equity firms, has traded on Goldman Sach's (NYSE: GS) private exchange, GSTrUE OTC. Unfortunately, the shares are down 40% (since August). Of course, other alternative asset managers – such as Blackstone (NYSE: BX) and Fortress Investment Group (NYSE: FIG) – have suffered plunges as well.
So what's the next step for Apollo? Well, the firm plans to trade on the NYSE. The IPO filing calls for raising $475 million of capital.
Apollo got its start in 1990 and profited handsomely from distressed investments (keep in mind that this was after the buyout boom). Now, the firm manages $40.3 billion and has recently raised a fund for $12.5 billion. Over the past 18 years, Apollo has generated an impressive 29% net internal rate of return.
Target Corp. (NYSE: TGT) said Wednesday that President Gregg Steinhafel would take over for retiring CEO Bob Ulrich, who would step down as CEO on May 1. He will remain as chairman through Jan. 31, 2009.
As CES winds down, all eyes turn their attention to next week's Macworld and speculation on what Apple will showcase and introduce this year -- after last year's iPhone debut -- are abundant, but mostly Apple Inc (NASDAQ: AAPL) is expected to introduce an ultra-slim laptop computer and online movie rentals at its biggest annual show next week. Meanwhile, for interesting reading, Wired has a four-page piece on how the iPhone changed the wireless industry, turning the table around on carriers and giving power to manufacturers.
India's Tata Motors Ltd (NYSE: TTM), which is negotiating the purchase of Ford's (NYSE: F) luxury brands -- Jaguar and Land Rover -- unveiled the Nano, a 4-seater world's cheapest car with an engine around 625cc. The price tag will be about $2,500 and it will go on sale later this year.
MOST NOTEWORTHY: Fortress, ITT Educational Service and Kendle International were today's noteworthy initiations:
Fortress Investment Group (NYSE: FIG) was initiated with a Hold rating and $18.50 target at Jefferies. The firm expects near-term volatility given the increasingly difficult private equity market.
Banc of America assumed coverage of ITT Educational Service (NYSE: ESI) with a Buy rating and $130 target and believes the recent weakness creates an attractive entry point as they see continued margin expansion and upside to Street estimates.
Susquehanna expects Kendle International (NASDAQ: KNDL) to benefit from positive trends in the Clinical Research Organization industry, expanded customer base and geographical reach, integration of Charles Rivers Laboratories (NYSE: CRL), and backlog. The firm started shares with a Positive rating.
Last Wednesday, the mega hedge fund Och-Ziff went public. But investors were jittery and the stock has already dropped 12.5% since its debut.
Well, it may drop even more -- that is, according to a piece in Barron's [a paid service]. In fact, the author, Andrew Bary, calls the company's investment performance an example of "mediocrity."
The current market value of Och-Ziff is about $10.8 billion, which means it is trading at about 18 times earnings. So, on its face, this seems reasonable, right?
Well, you need to make some adjustments. First of all, there is the favorable tax treatment (which may undergo some changes in Congress).
Next, Och-Ziff relies primarily on hefty fees for its investment performance. But, what if the firm has a down year? It could be a big hit to the bottom line.
Just imagine if hedge fund giant Och-Ziff (NYSE: OZM) went public earlier this year. It certainly would have been a stellar performer. Unfortunately, the public offering came Wednesday with the stock falling 4.2% to $30.65.
Ironically, Och-Ziff seems well-positioned for the volatile markets. Since 1994, the CEO of the firm, Daniel Och, has built a global franchise that spans the markets in the US, Asia and Europe. What's more, he has taken a multi-strategy approach, which involves merger arb, convertible arb, equity restructuring, distressed credit investments and so on.
More importantly, Och-Ziff is a big believer in strong risk management. In fact, this was a key for the firm's strong performance in 2001-2002.
As a result, Och-Ziff has picked up a large amount of assets (the current amount is about $30 billion). In fact, the mega sovereign fund, Dubai International Capital, agreed to invest $1.15 billion in the firm.
With the awful performances of the IPOs of Blackstone (NYSE: BX) and Fortress (NYSE: FIG), it was no surprise that Wall Street was lukewarm on Och-Ziff. Taking the long view on things, however, the growth prospects look promising as major investors seek out diversified alternative asset managers.
The lead underwriters on the Och-Ziff deal include Goldman Sachs (NYSE: GS) and Lehman Brothers (NYSE: LEH).
Well, there was some relief (it also helped that there was a big rally in equities). The company, which operates private equity and hedge funds, posted a net loss of $38 million, or $0.52 per share in Q3. Although, if you strip various elements -- such as certain tax and compensation -- the firm earned $111 million, or $0.19 per share (which is known as pretax distributable earnings).
It was a relief that Fortress indicated there was little exposure to the subprime mess. If anything, the firm sees opportunities in the sector.
In fact, Fortress has some big plans. The firm is in the process of raising funds, with assets of $10 billion to $15 billion. The initiatives will range from infrastructure, commodities, emerging markets and Asian real estate.
What's more, Fortress had a nice realization on its Crown Castle investment. The original investment came in 2002, which involved an initial $120 million stake. The total proceeds since then? A cool $1.7 billion.
Yes, it's a reminder that the private equity business can be very enticing indeed.
Fortress Investment is a global alternative asset manager with approximately $43.3 billion assets under management as of 6/30/07.
FIG is recently down $2.07 to $19.98.
FIG call option volume of 978 contracts compares to put volume of 6,248 contracts. FIG November option implied volatility of 105 is above its 26-week average of 49 according to Track Data, suggesting larger risk.
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Only strong retailers will survive
Not much fun for GameStop in Q3
Closing Bell: Stocks continue to plummet; AMGN, GE, MSFT, PEP, STP all down
