Aetna Inc. (NYSE: AET) Reiterated Buy with $51 target at Argus.
Aixtron SE (NASDAQ: AIXG) Raised to Buy at Goldman Sachs.
Cognizant Technology Solutions (NASDAQ: CTSH) Removed from Conviction Buy List at Goldman Sachs.
F5 Networks, Inc. (NASDAQ: FFIV) Raised to Neutral at Goldman Sachs.
Green Dot Corporation (NYSE: GDOT) Raised to Buy at Goldman Sachs.
HollyFrontier Corporation (NYSE: HFC) Reiterated Buy as Value at Zacks.
Illinois Tool Works Inc. (NYSE: ITW) Cut to Underperform at BofA/ML.
International Business Machines Corporation (NYSE: IBM) Raised to Buy at Goldman Sachs.
Lexmark International Inc. (NYSE: LXK) Cut to Sell at Goldman Sachs.
MeadWestvaco Corporation (NYSE: MWV) Raised to Buy at BofA/ML.
NetApp, Inc. (NASDAQ: NTAP) Raised to Overweight at Piper Jaffray.
Optimer Pharmaceuticals (NASDAQ: OPTR) Maintained Outperform as Bull of the Day at Zacks.
Oracle Corporation (NASDAQ: ORCL) Raised to Top Pick at FBR.
Pier 1 Imports, Inc. (NYSE: PIR) Cut to Equal-Weight at Barclays.
Tyco International Ltd. (NYSE: TYC) Raised to Buy at BofA/ML.
Under Armour, Inc. (NYSE: UA) Raised to Outperform at FBR.
Unisys Corporation (NYSE: UIS) Cut to Underperform as Bear of the Day at Zacks.
Visa, Inc. (NYSE: V) Raised to Conviction Buy List at Goldman Sachs.
VMware Inc. (NYSE: VMW) Raised to Outperform at Credit Suisse.
W.W. Grainger Inc. (NYSE: GWW) Raised to Buy at BofA/ML.

You are invited to join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

The first matter of order is that short sellers keep attacking SIRIUS XM. Yesterday marked the short interest report date as of May 13, 2011 settlement date, and that short interest has grown to more than 289.9 million shares short.  This was the fifth consecutive increase in the short interest and is the highest reading in a year.

Mel Karmazin gave a shareholder presentation yesterday.  We summarized the key metrics below:

• The outlook included some $3.0 billion in projected 2011 revenue. a projected $715 million in EBITDA, $350 million in free cash flow, and a growth to 21.6 million total subscribers,
• The company has also shown how its borrowing costs have dropped, with its last bond sale being down to 7.625% on an unsecured basis, down from 9.75% on a secured basis in August 2009.  The new yield is roughly 6.2% as to where the bonds are trading now.  It also has no significant bond maturities until mid-2013.
• As far as net cash after expenses and debt payments ahead, Sirius sees about $707 million at the end of 2011 and about $1.057 billion at the end of 2012.  As far as cash, the company did note that it might consider acquisitions, dividends, or stock buybacks.
• Full presentation here.

We would note that rival Pandora is still too small to even really show up as a SIRIUS XM super-threat.  The problem is that Pandora has filed for an IPO and it remains one of the top-watched stocks on the private market of SecondMarket.

The other issue is the credit rating upgrade from Moody’s, where SIRIS XM saw its credit rating go from B3 to B2 and the ratings agency also raised its probability of default rating from B2 to B1.  These are still far from investment grade but the trend for credit ratings has risen and risen.

When SIRIUS XM hit $2.00, we opined that it was going to likely take a new class of shareholders to keep buying the stock up higher and higher.  Many of the growth metrics were already priced or at least already accounted for when shares went from $1.00 to $1.50, and then to $1.75, and then to $2.00.  Now shares are at $2.32.

It seems that the reason SIRIUS XM keeps rising is that the new shareholders are buying into the growth story more than we and more than others expected.  Growth is hard to come by and the reality is that it is impossible to argue that SIRIUS is one of the top media subscriber services in the country. SIRIUS XM remains a battleground stock.  At $2.32, its 52-week trading range is $0.88 to $2.42.

JON C. OGG

As a reminder, Warren Buffett is the first one to tell you that NET INCOME IS NOT THE ISSUE TO WATCH….. We recently noted, “There was one troubling admission in this last annual report, although it has been known for some time by professional investors… Net income is almost irrelevant when reported.  Yep, it does not matter what Berkshire Hathaway says “net income” is…  Buffett noted in the most recent annual report, ‘Regardless of how our businesses might be doing, Charlie and I could – quite legally – cause net income in any given period to be almost any number we would like.  We have that flexibility because realized gains or losses on investments go into the net income figure, whereas unrealized gains (and, in most cases, losses) are excluded.’“

Buffett put the net income figure as being down to $1.511 billion, a shocking figure on the surface as it is less than half of the $3.633 billion it reported in the first quarter of 2010.  Operating earnings, something which matters more than the net income, also fell to $1.593 billion in the first quarter versus $2.222 billion seen in the first quarter of 2010.  It is the underwriting of insurance that accounts for the bulk of the damage here to operations, and it is the difference in the gains and losses in investments and derivatives that took the most toll on net income. 

The “investment gains and derivative gain/loss” was -$82 million versus a gain of $1.411 billion in the first quarter of 2011.  Here is a brief breakdown of those Q1-2011 after-tax earnings figures (compared to Q1-2010):

• Insurance-underwriting was -$821 million vs, $226 million;
• Insurance- investment income was $952 million vs. $988 million
• Railroad, utilities, and energy was $908 million vs. $505 million
• Manufacturing, services & retail was $558 million vs. $477 million
• Finance was $96 million vs. $69 million
• “Other” was -$100 million vs. -$43 million

Berkshire Hathaway highlighted what the three big culprits were in this underwriting loss: 

• Australian floods and Cyclone Yasi hit $195 million
• New Zealand Earthquake hit $412 million
• Japan’s earthquake hit $1.066 billion

This is one of those things that just happens in the world of insurance.  Buffett said in his most recent annual letter that he expects insurance to be profitable in most years but not all years.  Stay tuned, more will be coming out today.

JON C. OGG

Buffett may be even more upbeat this year than last year and probably be 180 degrees better than he was in 2009.  Buffett will also have to again explain how Berkshire Hathaway’s book value changes have underperformed the S&P 500 Index during the rally… The 2010 gain was 13.0% at Berkshire versus 15.1% for the S&P 500, while the 2009 gain was 19.8% versus 26.5% for the S&P.  Maybe Buffett should just point out the obvious that Berkshire Hathaway looks more and more like the weighting of a bond index AND the S&P 500 Index rather than just the S&P 500…The bird in the hand is that Berkshire Hathaway book value was “only” down 9.6% in 2008 while the S&P 500 suffered a whopping loss of 37% and Berkshire Hathaway’s book value rose more than the S&P 500 Index in 2007, 2006, and even 2005.

As of today, we do not yet have the book value per share for the first quarter.  That book value per A-Share was $95,453.00 versus a share price of $120,450.00 at December 31 and versus $124,450.00 as of Tuesday’s closing bell price.  We expect the earnings release to come shortly before the annual meeting this weekend, so we’ll expect an updated book value.

Goldman Sachs Group Inc. (NYSE: GS) is a position that Buffett will not have to deal with now.  Last year his shareholders acted dumbfounded in silence when Buffett defended Lloyd Blankfein by saying he just wished that Blankfein had a twin brother he could hire.  Goldman Sachs has repaid that 10% preferred investment from late-2008, but by our count he still holds those warrants and will use them opportunistically.

General Electric Co. (NYSE: GE) has a longer lock-up period on being able to call away those 10% preferred shares bought in late-2008, and we would expect to hear Warren Buffett telegraph that he expects GE to call the shares away.

The one other big issue we will go ahead and get out of the way is the recent fiasco regarding the David Sokol departure.  He went from being considered by Wall Street as a potential Warren Buffett successor to an ‘insider-insiderless’ trading scandal overnight due to his personal stock trading ahead of and into the Lubrizol Corporation (NYSE: LZ) merger.  Our take, particularly after seeing the reaction from our own independent reader survey, is that this will simply go away… over 49% said it will only affect David Sokol and over 34% said that neither Sokol nor Berkshire will likely suffer any real damage.  The issue, though, is far from settled for now since a Berkshire Board Committee said that Sokol mislead Buffett and other top executives about his stock trading ahead of the Lubrizol deal.

Another portfolio change we expect to hear more about is the BNSF giant railroad acquisition.  This transformed the company, and Buffett has claimed on multiple occasions that this acquisition went far better than he expected.

Our take is that  Ajit Jain seems to be the favorite, if you trace sentiment internally, as Buffett was quoted in a prior annual letter: “If Charlie (Munger), I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit.”  In the most recent annual report, Buffett was quoted as saying, “Ajit has created an insurance business with float of $30 billion and significant underwriting profits, a feat that no CEO of any other insurer has come close to matching. By his accomplishments, he has added a great many billions of dollars to the value of Berkshire. Even kryptonite bounces off Ajit.”

Buffett is also expected to highlight at least some updates to his quarterly holdings, although he is not bound to address anything more for another two and a half weeks when his quarterly filings are required to be made.  As of our latest report, the top holdings were The Coca-Cola Company (NYSE: KO), Wells Fargo & Co. (NYSE: WFC), American Express Company (NYSE: AXP), and Procter & Gamble (NYSE: PG).

His  March 15 letter called for the bank to run on a fortress-style balance sheet, played down any new mergers and stuck by his commitment to raise the dividend and to resume share buybacks.

It is curious as to why Moynihan would allow a letter that was likely to be seen by all shareholders to be issued before regulators took action.  We know that Bank of America will eventually get to raise its dividend again.  The question is when.  Citigroup Inc. (NYSE: C) was allowed to pay a tiny dividend with a yield of less than 0.1% on a split-adjusted basis.

At issue is that BofA’s balance sheet has more unknown liabilities on the mortgage side of the equation back to the Countrywide days.  It is also above the 10% deposit ceiling and it truly is a ‘Too Big to Fail’ bank.  BofA is no JPMorgan Chase & Co. (NYSE: JPM) nor is it even a Wells Fargo & Co. (NYSE: WFC).  Those two banks are healthier and that is why they were allowed to boost their payouts.

Moynihan’s quote in the introduction to the annual report noted, “We also believe… this model will enable us to put in place a prudent capital management strategy in the near future that, pending regulatory approvals, includes a higher dividend and stock repurchases.”

When we see news like this we at least question what on earth management and the communications departments might have thought.  Perhaps this was simply a decision on formatting and printing as this was part of the annual report.

We’ll skip over being too critical and we won’t call anyone delusional on this one here because it feels and looks like the firm had already made its commitment to its annual report.  BofA will get to raise its dividend, but we do not feel that the Federal Reserve is going to allow a JPMorgan or Wells Fargo type of dividend hike.

Our guess is that 20% of the bank’s future income will be allowed to be used for dividends and share buybacks in late-2011 or in 2012 with more to follow in 2013 and 2014.  That is assuming that a recession or bank losses do not come back in and interrupt the return to a normalization of bank earnings and operations.

JON C. OGG

The first issue we want to note is that if you go through Buffett’s most recent portfolio changes, he made more sales than in any recent quarter we have seen.  This raised loads of cash and now Buffett is looking for another “whale of a deal” or something like it.  While we would not expect another BNSF-sized deal, Bershire Hathaway’s cash and cash equivalents registered a whopping $38.2 billion at the end of 2010.  We want to address the 13% gain in the book value of $95,453 per share later.

Before bashing old Warren on derivatives like you have seen before, Berkshire Hathaway’s derivative gains registered $2.17 billion in the fourth quarter.  Buffett also unwound 8 contracts late in 2010 for a $222 million gain in the quarter.  This was just one factor that led to a total earnings gain of 43% to some $4.4 billion in fourth quarter profits.

If you want to know how the latest whale of a deal worked out in the Burlington Northern buyout, it is supposedly working even better than he expected.  Buffett claims that the earnings power is being boosted by almost 40% pre-tax and more than 30% after-tax.

Buffett sees a better business climate in 2011.  The question is whether or not he will overpay for his next megadeal  As far as dividends, we have no promise that Berkshire Hathaway will pay one.  Our belief is that Buffett will still focus on steady industries rather than riskier high-growth industries.

As the eternal optimist, Buffett argues that America’s best days are ahead.  He is still wary of borrowing money and on the earnings reported by some companies.  Buffett also noted that the performance of the past has little chance of being repeated due to the size of Berkshire now.

Investors have yet another year with no formal succession plan in place for Warren Buffett.  We all know that cannot go on forever.  The new portfolio manager Todd Combs is going to manage $1 to $3 billion in equity positions, without being limited solely to equities.

We want to go back to one thing here. The 13% in annual book value gains to $95,453, this lagged the S&P yet again.  With many components being less market oriented, some of this is no shock.  Buffett also noted in his letter, “some of our businesses are worth far more than their carrying value on our books.”  For instance, At GEICO alone Buffett noted that GEICO’s premium volume is $14.3 billion and growing, yet the goodwill of GEICO is carried as only $1.4 billion on the books.  Buffett said “the real value of GEICO’s economic goodwill” is about $14 billion.  The share price is $127,550.00 for the A-shares now, giving Buffett a hefty premium if you do not consider some of these book value anomalies.  Another part of the premium is because Berkshire Hathaway was added to many indexes and index-funds had to acquire large sums of A and B shares whether they wanted to or not.

A few things that investors need to consider about Berkshire Hathaway after 2011.  Both General Electric Co. (NYSE: GE) and Goldman Sachs Group Inc. (NYSE: GS) have every intention of paying off that 10% preferred investment that Buffett made during the market meltdown.  Buffett has exited Bank of America Corporation (NYSE: BAC) entirely and the Wells Fargo & Company (NYSE: WFC) stake is now a whopping total of more than 342 million shares.  If Wells Fargo is the same share count, that was worth $11.08 billion as of Friday’s close.

It would be very easy to just bash Buffett for underperforming the S&P 500 in book value growth again or for Berkshire Hathaway shares trading at such a large premium to book value.  Unfortunately, those ‘facts’ come with caveats and asterisks and are not necessarily representative of the full story.

We also wonder whether Buffett’s goal of growing book value faster than the S&P 500 is even fair, let alone possible.  Much of Berkshire’s empire is income oriented in stable business that just do not grow at nor can they ever grow at the same rate of say Apple Inc.  (NASDAQ:  AAPL).  Perhaps the biggest measurement will come from how Berkshire Hathaway does in the next market correction.  If it holds up better than the broad market then investors know they have a winner.  If it performs worse than the market in a downfall and lags in an upswing, then Berkshire Hathaway may be irrelevant.

JON C. OGG

In our review we have taken out ten of these lesser-known factoids for review and added color where appropriate.

Regions today… Here is the current breakdown of branches by state: Alabama-244; Arkansas-100; Florida-397; Georgia-142; Illinois-68; Indiana-64; Iowa-13; Kentucky-16; Louisiana-118; Mississippi-147; Missouri-67; North Carolina-9; South Carolina-36; Tennessee-263; Texas-85; Virginia-3….FOR A GRAND TOTAL of 1,772.  As of December 31, 2010, Regions and its subsidiaries had 27,829 employees.  Total salaries and employee benefits increased $49 million, or 2 percent, in 2010. The year-over-year increase in salaries and employee benefits cost is due to higher pension and 401(k) expense as explained below. Although salaries and benefits expense increased, headcount was reduced approximately 2 percent in 2010

Financial Summary… At December 31, 2010, Regions had total consolidated assets of approximately $132.4 billion, total consolidated deposits of approximately $94.6 billion and total consolidated stockholders’ equity of approximately $16.7 billion.  The bank’s market cap as of Thursday’s close was $9.3 billion.  Also, don’t forget that it owns Morgan Keegan & Company with approximately 1,200 financial advisors offering products and services from over 321 offices.  It also owns Regions Insurance Group, Inc., Regions Equipment Finance Corporation, and some reinsurance operations.

Available capital… Regions had interest-bearing deposits in other banks of $4.9 billion, and the loan-to-deposit ratio was 88 percent; borrowing capacity with the Federal Reserve Discount Window was $16.6 billion based on available collateral and borrowing capacity with the FHLB was $1.2 billion based on available collateral. During 2010, the provision for loan losses decreased to $2.9 billion compared to $3.5 billion in 2009. Regions noted on its capital ratios, “The minimum guideline to be considered well-capitalized for Tier 1 capital and Total capital is 6.0 percent and 10.0 percent, respectively. At December 31, 2010, Regions’ consolidated Tier 1 capital ratio was 12.40 percent and its Total capital ratio was 16.35 percent.”

Revenues from Royalties… Most consider that SanDisk gets its all of its revenues from manufacturing and selling NAND Flash, but SanDisk has a royalty business as well.  It noted, “We have an extensive patent portfolio that has been licensed by several leading semiconductor companies and other companies in the flash memory business.  Our cumulative license and royalty revenues over the last three fiscal years were approximately $1.28 billion.” That comes to an average of more than $100 million per quarter in revenues from royalties and the estimate for the coming quarter is $1.25 billion.  Royalty revenues are generally deemed to be much higher in profits and margins than operating revenues.  It noted, “We have various patent licenses with several companies including, among others, Hynix, Intel Corporation, or Intel, Lexar Media, Inc., or Lexar, a subsidiary of Micron Technology, Inc., or Micron, Panasonic, Renesas Technology Corporation, or Renesas, Samsung, Sharp Electronics KK, or Sharp, Sony and Toshiba.” This also declined in the first quarter of last year due to its renewed license pact with Samsung and it noted that there are risks about future renewals as well later in its risks section.

The lack of Apple ties… The only two places that Apple Inc. (NASDAQ: AAPL) is mentioned throughout its 10-K is as competition in the digital audio market (iPod versus Sansa).

Continued credit pressure… E*TRADE is widely believed to be seeing credit improvements despite its losses reported for the last three years.  The company noted in its RISK FACTORS, “Although we have taken a significant number of steps to reduce our credit exposure, we likely will continue to suffer credit losses in 2011… While we were able to stabilize our retail franchise during 2008, 2009 and 2010, it could take additional time to fully mitigate the credit issues in our loan portfolio and return to profitability.” The company also noted that it will continue to experience losses in its mortgage loan portfolio.

Leverage exists here… After a 2009 debt exchange, it had a ratio of debt (corporate debt) to equity of 53% as of December 31, 2010.

Investigations and suits… While the basis goes back to 2007 an investigation is still listed under risks.  It noted, “In addition, the SEC initiated an informal inquiry into matters related to our loan and securities portfolios. The defense of these matters has and will continue to entail considerable cost and will be time-consuming for our management. Unfavorable outcomes in any of these matters could have a material adverse effect on our business, financial condition, results of operations and cash flows.” In its Legal Proceedings, E*TRADE noted that the company is cooperating fully with the SEC in this matter.

Competition and consolidation… Again, E*TRADE has been considered a takeover candidate by many investors, but many believe that it would come after it gets its books in better order.  E*TRADE addressed the consolidation opportunities here and noted, “There has recently been significant consolidation in the financial services industry and this consolidation is likely to continue in the future. Should we be excluded from or fail to take advantage of viable consolidation opportunities, our competitors may be able to capitalize on those opportunities and create greater scale and cost efficiencies to our detriment.”

Deferred tax assets… Due to an effective change of control, E*TRADE noted that it is possible that it could ultimately lose a significant portion of its deferred tax assets and that could have a material adverse effect on our operating results and financial condition.  It had net deferred tax assets of $1.5 billion as of December 31, 2010.

Debt covenants… E*TRADE’s ability to incur additional debt if its Consolidated Fixed Charge Coverage Ratio is less than or equal to 2.50 to 1.0. As of December 31, 2010, E*TRADE’s Consolidated Fixed Charge Coverage Ratio was 0.95 to 1.0. The terms of any future indebtedness could include more restrictive covenants.  That debt can be accelerated if covenant violations are not remedied: “We could be forced to repay immediately all our outstanding debt securities at their full principal amount if we were to breach these covenants and did not cure the breach within the cure periods (if any) specified in the respective indentures. Further, if we experience a change of control, as defined in the indentures, we could be required to offer to purchase our debt securities at 101% of their principal amount.”

CITADEL Domination… Citadel may not be as deeply entrenched as previously thought, but it still has ample influence.  Citadel is E*TRADE’s largest shareholder and debt holder, with approximately 9.9% of the common stock or approximately 27% of the common stock assuming conversion of convertible debentures it holds. Citadel is not required to disclose the amount of E*TRADE’s outstanding debt securities it owns, but E*TRADE believes that Citadel owns about $590 million of the non-interest-bearing convertible debentures. Kenneth Griffin, President and CEO of Citadel, joined the Board of Directors on June 8, 2009.

Anti-takeover provisions… E*TRADE does have defense against an unwanted takeover, which is important considering that many believe that E*TRADE will be acquired.  These include an authorization for the issuance of “blank check” preferred stock; a provision for a classified Board of Directors with staggered, three-year terms; prohibition of cumulative voting in the election of directors; a super-majority voting requirement to effect business combinations and certain amendments to our certificate of incorporation and bylaws; limits on the persons who may call special meetings of shareholders; the prohibition of shareholder action by written consent; and advance notice requirements for nominations to the Board or for proposing matters that can be acted on by shareholders at shareholder meetings.   While these are not uncommon, it is worth noting.

Property ownership versus leasehold… Of the 525,000 square feet it lists as main offices, E*TRADE said all but 165,000 square feet of its offices space in Alpharetta, Georgia is leased.  It also leases all of its 28 E*TRADE branches of 2,500 to 7,000 square feet, and it noted that its facilities space is adequate to meet its needs in 2011.

Its customer base… While commissions per trade have come down 1%, there was account growth through the recession.  New customers were only 54,232 in 2010 but it ended with 2,684,311 accounts at the end of 2010.  Customer assets rose to $176.2 billion from $150.5 billion at the end of 2010, with the “net new brokerage assets” being some $8.1 billion of that sum.

Again, reviewing an annual report is not just to highlight weakness.  Many of these data points should be viewed favorably considering where E*TRADE was back in 2008 and into early 2009.  Whether you want to consider E*TRADE as an acquisition candidate or not, we always maintain that any investment should be evaluated on its own merits rather than just because a strategic or opportunistic acquirer might be able to able to milk more out a target than the target could itself.  Know what you are investing in!

There is a deep summary of a Bank of America Merrill Lynch report from late-2010 that outlines an expected time line and expected price for a buyout here in E*TRADE for your review.

You can join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

The Ultra-Mobility Group, the current hot-zone of the processor market… Intel noted, “In 2010, we introduced an Intel Atom processor-based platform that provides significantly lower power consumption compared to previous-generation Intel Atom processor-based platforms. The new platform is designed for a range of computing devices, including high-end smartphones and other mobile handheld products.”

Shrinking its processor technology… Intel noted, “As of December 25, 2010, the majority of our microprocessors were manufactured on 300mm wafers using our 32nm process technology. In the second half of 2011, we expect to begin manufacturing microprocessors using our 22nm process technology.:

Flash alert… Intel’s NAND flash memory products are manufactured by IMFT, a NAND flash memory manufacturing company that it formed with Micron Technology, Inc. (NASDAQ: MU).  As of December 25, 2010, Intel has committed to purchase 49% of the manufactured output of IMFT, and that assembly and test of NAND flash memory products is performed by Micron and other external subcontractors.

Current Customer Concentration… Intel’s current mix is still largely PC and server-oriented.  In 2010, Hewlett-Packard Company (NYSE: HPQ) accounted for 21% of its net revenue (Versus 21% in 2009 and 20% in 2008), and Dell Inc. (NASDAQ: DELL) accounted for 17% of net revenue (versus 17% in 2009 and 18% in 2008).  The company noted that no other customer accounted for more than 10% of its net revenue.  In short, 38% of sales were from just two PC and IT vendors.