RIMM: superb sub adds not leading to great EPS performance.

I hope that everyone had a merry Christmas. I wanted to give you my post earning comment on RIMM which reported earning after the market close last Thursday. I was on my personal trip to Las Vegas so I could not provide you my take on the earning on a timely basis. So I apologize for that.

RIMM continues to defy my expectation and deliver earning results that is blowing away the street estimate. And hats off to the management team for their efforts !. Heading into the earning, I indicated to you that RIMM had a lofty expectation and had more downside than the upside. I claim that the company needs to report significantly better than sub add number for this Q (expectation around 850K). I also claim that the company will need to guide higher for next Q sub add decidedly above the street expectation around 925K. And it is also expected that the company will handily beat both the revenue and the EPS number to further gain the momentum in the share price appreciation.

(see http://www.investorhives.com...)

RIMM met and exceeded all the points that I thought would be challenging for the company except on one front: gross margin. However, this is a significant development that further reinforce my short view on the stock. After listening to the conference call, following up with several analysts reports as well as doing number crunching on my own, I am more convinced that RIMM story is nearing its end. It will have one more great Q but in my opinion, as upgrade cycle behind Pearl dissipates beyond Feb Q, RIMM may see increasing margin pressure that will decrease the earning leverage despite the possible upward trend in the revenue number. Consequently, beyond Feb Q, I see company gross margin compression will shrink the market multiple for RIMM. Slower EPS growth may ensue and RIMM share may face weakness. I continue to view RIMM as a good short candidate. Above $135 level, I continue to recommend adding to your short position.

Let us look at this Q number. RIMM delivered revenue number of 835 M, significantly above the consensus number of $812 M. The net sub add for this Q was 875K, also significantly above 850K expected. More importantly, for next Q the company guides for sub add of 950K to 975K, above around 925K expected. The revenue guidance was $900 ~ $940 M, which is also above what the street was expecting. On these exciting quarterly metrics, the RIMM shares traded as high as $140 after the market. But on the actual trading day on Friday, the shares closed with 2% loss. Why? Despite the blowout revenue number for this Q and head and shoulder above number for next Q, the actual reported EPS for this Q was 95 cents versus 94 cents expected. In addition, the company guides for EPS in the range of 92 to 99 cents for next Q. Given the significant upside in revenue and sub adds metric this Q and great guidance on these metrics for next Q, EPS number reported for this Q and guided for next Q are disappointing. This appears to be due to the deteriorating overall gross margin to 53% from high 55% range.

Going forward, RIMM may face even more pressure in maintaining the GM. First of all, rapid growth in the company revenue number is primarily driven by the hardware sales, not by robust uptick in the service side (data contracts). Many existing RIMM customers like the Pearl design and are switching their device to Pearl from older products. In fact, Smithbarney estimates that only 30 to 40% of the new customer chose data plan with the subscription service. This may not be surprising: many consumers do not like to pay a lot of money for email service (they want this cheap like the regular phone). Pearl is supposed to gain acceptance in the consumer market outside the enterprise market but net addition in this segment may be much more challenging. Thus, RIMM's business around Pearl has risk of being more hardware oriented and this may result in lower than expected gross margin.

In addition, Pearl has lower ASP (Average Selling Price) compared to older RIMM product. As Pearl sales cannibalize other older RIMM products, the company revenue may be skewed towards the product that may have more margin pressure. Pearl competes in the consumer market with more than six fierce competitions (Nokia, Motorola, LG, Samsung, Palm, as well as HP and the number is growing). In the future, RIMM may need to be more aggressive in the marketing and pricing to compete more effectively in the consumer market. This may result in increased op ex spending and reduced net profit margin.

Finally, there is also uncertainty down the road how carriers will treat RIMM. While MSFT server related products do not charge carriers for any fees, RIMM does. This even raises RIMM business model in the enterprise market. As smartphones made by Samsung and LG operates on window based platform, carriers may push non-RIMM related service to the corporate clients to increase their profitability.

Ultimately, RIMM may face more margin pressure in the enterprise business as well. For these reasons, I contend that RIMM will not be able to sustain earning growth at a rate greater than 25% on a long term basis and 10 to 15% may be the more appropriate number that investors should be using to value its share price. Consequently, the market multiple for RIMM shares must come down significantly. I am willing to give premium PE to RIMM compared to its competitors who are getting roughly anywhere between 15 to 17. For RIMM, I continue to contend PE should be in the range of mid 20's, not 40 to 50 that it is trading on a trailing basis and higher than 30 on a forward basis.

The shares of RIMM have been burining brightly as insatiable investor' appetite for the sexy tech stocks continue to push share price higher. However, I do believe that the flame burns the brightest before it goes out. And RIMM flame will be no exception.

RIMM: Investors expecting a premiere performance

Research in Motion, the company which provides a popular blackberry service, was initiated into the 2007 stock list for our group in late Nov. We are playing RIMM on the short side. At that time, I maintain that coupled with the favorable investment sentiment for the tech sector, the stock could continue to advance till early January. The stock is now trading at lofty $134 level and has more than doubled in last six months. The company is set to report the earning after the market close tomorrow.

RIMM has reported stellar earning results last Q. The results surpassed the investors' expectation and analyst community. Since then the stock has been on a tear. RIMM has recently introduced the new smart (email) phone called Pearl and the management team has pictured extremely rosy picture for the future business climate based on this product's success. Pearl is thought to be penetrating significant portion of the consumer smart phone market outside the traditional enterprise business for RIMM and will be the engine for next phase of the growth for the company.
No doubt that Pearl is selling extremely well. Lehman's research indicates that Pearl is generating 15K net sub adds in last 2.5 weeks of September. Lehman thinks T-mobile alone is able to generate 200K net sub-adds this Q. In addition, although not as strong as T-mobile, Cingular and Verizon will also contribute a fair number of sub adds for the company. However, it does appear that Sprint has been a bit slow for RIMM to generate robust sub adds to date. Because of the great sell-thru of Pearl, I believe RIMM will report very strong number, probably 4 to 5 cents ahead of the consensus estimate of 94 cents.

The question is how much of this great story for Pearl is built into the stock price. RIMM is currently trading at PE of 40 on a trailing basis and PE of near 30 based on a forward basis. This implies great premium for the company compared to its competitors such as Nokia, Motorola, and Samsung, which are typically trading with PE of somewhere between 15 to 17. By this type of valuation, the investors are assuming that RIMM is in the midst of the robust growth that will last for a foreseeable future. RIMM is valued to be in a secular growth mode, rather than in cyclical growth mode.

For RIMM to continue to get this type of PE multiple, the company is now pressured to show that this Q was outstanding and next Q will be as well. In my opinion, if the company delivers bottom-line number that is about 4 to 5 cents higher than the mean estimate, investors will be disappointed as they will be looking for blowout Q performance. In addition, net sub add will be extremely important key metrics to pay attention. Bears maintain that strong Pearl sale will not last more than Q or two if it is mainly driven by the upgrades of the hardware by the existing customers. As such, the company needs to show strong net sub add performance this Q, far above the consensus estimate number of roughly 820K. The company guides for around 800K for this Q number during the last earning call. In my opinion, investors may be disappointed for anything less than 850K. More significantly, RIMM needs to guide higher for next Q net sub add number. The expectation is heading higher above 925K and I believe this may turn out to be very challenging for the company.

Because Pearl story has a significant consumer market component, I believe that the company cannot sustain this type of premium multiple for too long. The consumer smart phone market is extremely crowded by several competitions mentioned above. The pricing pressure for the product is great and the consumers have very little royalty for the product. This often leads to great churn number for the subscriber base. I can give higher multiple of greater than 30 for the enterprise segment of RIMM business, assuming RIMM continues to generate healthy subscriber growth (but some bears are also doubtful of this point). However, the consumer segment multiple should be roughly in line with what the competitions are getting, which is 15 to 17 range. As a result, it would be difficult to assign multiple greater than 22 ~ 25 range for the company. If you take current aggressive estimate of 4.62 and apply higher range of PE of 25, the stock would be fairly valued around $115 in 07. Should there be any weakness in the sales forecast, this multiple may further shrink and the shares are vulnerable for substantial downside.

RIMM is a relatively new stock for FilthyRich group and I may need to study the company fundamentals further to gain deeper understanding of the company. However, my current opinion is the company is heading into high expectation with the fundamental that do not support for the current share price.

Short term, investors may continue to be dazzled by Pearl sales number and chase this stock higher. Should this happens, you should be increasing your short position on the stock. Ahead of earning, it may be worthwhile taking 30% of your short position. Should there be a further price appreciation, you can establish your remaining position

JPM: Ambitious CEO to take the bank to another level.

About 13 months ago, I named JPM as a top pick for 2006. At that time, the stock was lagging the market with a share price of around $36. Today JPM is hovering around another 52 week high level, trading at $48.28. The stock is posting solid 34% gain to date. The investment thesis behind JPM was better risk to award scenario. I anticipated somewhat choppy 2006 in 2005 due to Fed prolonged rate hike throughout 2005. I thought that this would have some effect on the growth rate of the economy, causing earning deceleration in certain sectors. As financials have lagged the market, I went with financials as the area to focus due to improved risk to award ratio. Financials have been fighting tough business climates. Shrinking interest margin due to yield inversion, difficult mortgage business, and change in personal bankruptcy policy all weighed negatively on the bank stocks.

So what do I think about JPM now after one year? JPM business outlook is better than ever. I continue to believe that JPM is going to further improve its financial metrics, notably ROE and net profit margin. Although JPM continues to make solid progress on its ability to generate higher net profit margin, it is still lagging its primary competitors such as BAC and C. New CEO Jamie Dimon recently took the full control of JPM after being promoted to both Chairman and the CEO of the company. He vows that he can take the company ROE metrics to 20% level but many analysts are still skeptical of his view. At most optimistic case, the analysts believe that ROE for the company will be around 17% at best, about 4 to 5% below the well run large integrated bank such as C and BAC. However, even if the analysts are right, I believe that the company can still achieve 15% growth in EPS over next 5 years. Folks, JPM is a low risk, extremely sound investment that will show steady growth over next 5 years. I believe that the company will generate EPS exceeding $4.50 in 07, $5.15 in 08, and $5.9 in 09. Therefore, even if the conservative PE of 12 is applied, the stock will be trading around $62 in 07 on a forward PE basis. If Jamie Dimon is correct about generating 20% ROE for the company, the upside for the share price is even greater.

I also expect that Jamie Dimon will raise the company dividend sometime in 07. The company has not raised the dividend in last 3 years and I believe that this will bring more investor enthusiasm to the stock, especially for those who are seeking a balance between the aggressive growth strategy and value approach.

You have noted lately that Citibank's financial performance has been lagging BAC. There is much talk in the market that C will spin off several branches of the business or outright sell some of wealth management asset to the interested parties. Don't be surprised if JPM shows a lot of interest in what is coming out of Citi. While C may cut its investment on expanding business scale, Jamie Dimon who has been cleaning up its house and improving the operation may show aggressiveness in expanding business scale in 07. In my opinion, JPM has really consolidated its business operations well under common data management platform and may handle additional M&A activities with better than expected business synergies. Finally, I also expect the company may be a little bit more aggressive with its Investment banking; the company spent most its time to establish steadiness and consistency in 06 for Investment Banking area.

Turnaround for JPM is no where near complete. This implies plenty of earning leverage that you will see from the company. 2006 was the year for the company to demonstrate the ability to improve operational performance and build the organization for more consistent growth. 2007 will be the year for the company to leverage on the operational improvements that it has achieved to date and become more aggressive on expanding business scale. I expect as the company exits 07, the company will have largely finished the operational improvements and establish the business scale to compete effectively with C and BAC. This sets up the company to become lean, mean cash generating machine in 08 (of course with the economy not in recession).

As such, I see JPM as the core holding in my portfolio. Despite the solid gain we had to date, I will continue to hold onto the shares as I see far higher share price in the future. CTRP now has the best pick status for 07 for FilthyRich group. However, JPM has not disappointed us with 06 performance. While other tech, biotech and china stocks have been all over the map in 06 and gave stomach aches every now and then, JPM has been steady and consistent in 06 and I believe it will be the same in 07. So congrats to JPM shareholders in 06 and we look for even better things to come in 07.

GS: Don't miss the finale of the firework; PT raised.

I wanted to give you my take on the latest earning result for Goldman Sachs. The company reported Dec 06 result pre-market on Tuesday. Ahead of the earning, I suggested you take some money off the table should there be a pullback given the torrid earning upward revision (especially if you are playing with call options). I also claim that GS should be still able to beat the consensus estimate by a solid margin (by margin of 10 to 15 cents).

http://www.investorhives.com...

GS delivered the near best quarter performance in the company franchise history. Quarterly revenue came in at 9.4 billion. EPS was $6.59, significantly above the consensus estimate of $6.05. The company thus beat the bottom-line number by outstanding 54 cents, much higher than what I have expected despite the significant analysts' earning revision prior to the earning.

Despite the blowout earning, the stock dipped slightly from $205 level that the stock was trading heading into the earning call, settling slightly below $200 level. Friday was an option expiration day. So there was a battle among institutional traders who want their call option at $200 in the money and those who wanted to see their put option in the money as well. This caused the stock to remain volatile, fluctuating around $200 level throughout the week after the earning. Frankly, given the large price appreciation ahead of the earning, I thought I would see more downward pressure but the stock held firm and I believe it is in a position to make a solid advance in coming days. Consequently, I want you to use the profits gained by selling some portion of GS holding ahead of earning to buy back the shares at these level. I believe that the stock still has substantial upside. I am further raising the target price to $250 from $230.

Because GS earning performance has been so stellar this year, many analysts expect the earning has peaked for the company. At near $20 EPS, the stock is currently trading barely above PE of 10 on a trailing basis. In the future, many analysts see EPS performance dropping to $16 ~ $17 range next year and think that the stock is trading with forward PE of 11 ~ 12 range. Given the market uncertainty in the US rate environment and economic uncertainties, the traders may feel inclined to be extremely conservative with assigning appropriate PE multiple.

Traders were looking so hard for reasons to sell the stock after the quarter that their reason almost appeared to be trivial without much ground. Bears contend that this quarter's performance was entirely helped by the one-time $500 mil investment gain from its FICC (Fixed Income, Currency, and Commodity) operation with Accordia Golf in Japan. Also they were disappointed in the growth of the revenue in the Investment banking side which showed only 4% growth sequentially from the previous Q. In addition, the comp ratio was lowest at 26.6% so operating cost going forward is likely to increase, pressuring the earning performance.
The truth is that great environment in the investment banking area is just beginning. GS reported the extremely strong backlog in the investment banking side. The good news is still to come given the record amount of M&A activities and IPO deals in the US and abroad. In fact, GS has the strongest presence in China (see figures below) and I believe that the investment banking revenue from China alone will surprise many investors' expectation and take the GS shares to much higher level. In addition, in the winter, commodity market has firmed up from the previous Q and could again help GS to achieve higher than expected revenue in FICC side. Finally, as I expect good 2007 in terms of the market performance (although we could see some correction in early 2007), equity trading revenue could remain strong as well. In my opinion, analysts are too concerned about the fact that GS is doing too well.

However, GS's great performance should be interpreted as better performance to come rather than peaking earning for the company. 15 to 20 % EPS drop that many bears are seeing are the reason that GS shares may continue to advance. I see the earning leveling off from the current level but don't see the EPS dropping by the magnitude that some bears may content GS will face. I expect EPS performance of somewhere between $18 and $19, slightly lower from the current record $20 performance. Furthermore, towards the end of 2007, Fed could ease after making sure inflation is under control. This could support the PE multiple of the financial sectors to expand to 13 ~ 14 range from the depressed 10 ~ 11. As a result, the shares can trade decidedly above $250 if my contentions actually pan out in the market place.

In conclusion, GS had a great 2006. 2007 will be another solid year for GS and the shares could continue to rise as investors gain more confidence that GS business in no where near the state of collapse. I think investors should use any weakness in the stock price as a chance to add to their position.

GS: Expect fireworks but investors know it is 4th of July.

In my previous message dated 11/22/06, I indicated GS is on a path to have one of the best Q in terms of earning. I believed that the company will have a blowout Q, beating the consensus estimate by a wide margin. I bumped up my price target to $230 from $200.

http://www.investorhives.com/msgd.php?msg_...

At that time, I told you guys that the stock would decidedly break above $200 level as investors anticipate great earning from the company. Although the stock remained volatile over last two weeks, the stock is now at $205 and a change and some of you who have been playing with options or the stock may have racked up some nice gain. What do we do now heading into the earning on Tuesday morning?

Two weeks ago, the mean consensus EPS estimate for the upcoming Q was somewhere between $4.9 to $5. However, in the matter of two weeks, we have seen torrid upward earning estimate revision by many analysts. Now according to Yahoo mean estimate number, the consensus EPS stands at tall $6 a share. Ahead of the earning, Smithbarney raises to the target to $200 from $155 and bumps up the EPS estimate for the Q to be $6.65 while maintaining hold rating. S&P raises the target by $10 to $230 and adds the stock to top ten portfolio stock list. A small research firm Buckingham Research Group ups the target to $256, citing higher than expected income from M&A activities and IPO deals in Asia and Europe in coming months. Prudential also increased the target price to $215, citing gains from ICBC investment.

While I still continue to expect robust earning performance that will even beat the elevated estimate, investors are also expecting this and the higher EPS estimate largely reflects very robust business environment that GS had in M&A and IPO market in the US and in Asia. Due to substantial earning revision, chance for the blow-out for Q is less likely. However, it is still possible that GS will probably beat the estimate number by a solid margin (probably ~ 15 to 20 cents).

In my opinion, real surprise will come from the guidance and this is where investors should focus to determine the near term stock price movement. Currently, investors expect that GS cannot sustain this level of earning performance for next year and the company will see 10 to 15% earning depreciation from the current level. While this year's estimate is roughly anywhere between $19 to $20 EPS, for the next year, the estimate remains in the range of $17 to $18. However, even at this reduced expectation, the stock is trading just above PE of 11 on a forward basis. So this is not an expensive stock.

Furthermore, I believe that the estimate for next year's earning is too low. Next year is the third year before the presidential election and the stock typically performs the best during this year. In addition, prior to 2008 Olympics, I expect extremely strong Chinese equity market that will fuel very robust IPO deals. No investment firm is better positioned in China as GS is. Finally international exposure of GS may help the firm to rack up substantial currency gains. If Fed eases the interest rate by late next year, PE multiple will likely to expand to 13 to 14 level and with EPS that may exceed $18 next year, the stock may test $250. So we still have some solid upside from the current level.

Although GS is heading into the earning with increased expectation, I believe you should not sell all of your shares into strength. If you are an option player (I know some of you have racked up more than 100% gain), I suggest you sell half of your position and let your free money work for you. If you are a stock holder, I may take some off the table to add more shares in case of price drop after the earning: however, I would still hold onto the good portion of your GS holding. I expect favorable guidance from the management and this is where the surprise will be. Even in the case of stock price drop due to largely in-line Q, you will get a great chance to add additional shares. Seems like we cannot lose on GS..

Initiating two additional biotech names: ISIS and ALNY

When I was previewing ASH 2006 for our FilthyRich biotech names sometime ago, I noted that biotech industry will face great waves of M&A activities over next two years. This is because big pharma companies such as Merck, Pfizer, and Novartis will be on the hunt for small to mid cap biotech companies to accelerate their drug discovery process.

So far we have positioned our biotech names very conservatively in terms of valuation as I saw the market uncertainties amid slowing economy. My feeling was that biotech companies are less prone to economical cyclicality and provide investors with nice place to weather out the periodic volatile storms in the market as investors continue to debate the extent of the economic slowdown. Even in the biotech, I have been emphasizing the valuation. I have been recommending AMGN with low PE ratio and reasonable growth rate. I have replaced DNA with GENZ to also reflect the emphasis on the value. Genentech, FilthyRich's pick for 2005, has been a stellar performer in 05 (racked up more than 100% gain). However, as Avastin drug potential was properly being reflected in the share price, we removed the name and replaced with GENZ. GENZ is a specialty biotech company armed with wide array of drugs in the product line to treat very rare diseases. The company is a very consistent and steady grower with PE in the low twenty ranges. I will definitely outline this company in detail in the future as I see the current price as very attractive entry point. PDLI is a small to mid cap biotech name. Here I also emphasize the conservatism in picking this stock. PDLI has a great royalty revenue stream from a number of large biotech companies such as DNA and BIIB. While other small biotech companies must burn cash after cash in order to develop its pipeline and face the prospect of going bankrupt when their pipeline never materialize, PDLI is in a position to use its royalty revenue to develop its pipeline without seeing negative cash flow from its operation. PDLI is undervalued I believe. Once this company shows positive data for the emerging pipeline, the stock will be noticed. I believe that the company represents a good value here.
Having said that, I believe that biotech sector will see more investors who are willing to speculate on the industry M&A activities. Overall market conditions supports this trend. The bond market is topping in my opinion. There is plenty money that rotated out of the real estate market (all the money was in the real estate market from 02 to 05.) The energy and commodity speculation has also fizzled out. At this point, there is plenty of liquidity out there that is waiting to get into the stock market. Presently, money is favoring tech names; however, with the economy that is slowing some signs of slowing down, I believe that the risk in the tech market is increasing and am betting that the money could rotate out of tech sector as quickly as early next year. These available liquidities can find a way into biotech sector that makes biotech as one of the most exciting sectors to invest in 07 and beyond.

On top of these favorable market trends, these are compelling industry reasons why M&A activities may pick up in the biotech sector. Big pharmas' drugs are facing more generic competitions as many of their drugs face patent expiration by early 2010. But the pharma companies continue to struggle with developing legitimate pipeline for continued top line growth. Several days ago, Pfizer dropped bomb in the investor community by stating that its highly touted cholesterol drug (raises good HDL cholesterol) torcetrapid with 24 billion dollar revenue potential has major side effect problem and the company will cease the development of the drug. This now set the stage for major M&A efforts by Pfizer and other large pharma companies to acquire small to mid size biotech companies to beef up the pipeline.

Who could be the beneficiaries of this trend? I believe that the biotech companies with RNA technology will be the focus of M&A activities by the pharma companies. Merck has paid more than 50% premium in acquiring Sirna, a RNA biotech company. Merck's acquisition validates the RNA technology as viable source of new drug pipeline development. I would like to bring ISIS (Isis pharmaceuticals) and ALNY (Alnylam pharmaceuticals) to your attention. I am initiating these two names to bring up more species to our biotech list. ISIS is initiated at the price of $12.13 and ALNY is covered at the price of $23.81. I have been watching and studying these two names last three months and over this time, the stock had a tremendous run. As a result, rather than jumping in with a big bet, I would suggest using the pullback in the stock price to accumulate. In addition, let me emphasize that these two names contains high elements of speculation. ISIS has several drugs in the pipeline that is in the middle of trial stage 2. ALNY has their pipeline at even earlier stage than ISIS. So it may still take several additional years to bring the drugs in the pipeline into the market. So I suggest you limit your exposure to less than 5% of your overall portfolio for each stock.

RNA acts as a messenger in building the protein, which are the building blocks of the human life, from DNA strains. By carefully disrupting or manipulating the RNA process, these companies can target the protein productions of malignant tumors, formation of bad cholesterol, etc. Consequently, RNA technology offers very promising way of conquering the cancer, heart diseases, diabetics and many other diseases that is plaguing the human kind. I will highlight more about the RNA interference technology for ALNY and RNA antisepses technology for ISIS.

AMGN: Use the concerns over EPO hearing to add agressively

AMGN shares have been weak lately. FilthyRich group has initiated the stock at $61.79 on 6/28/05 along with CELG and PDLI. Although it is up by roughly 11% in a year and a half time frame, the shares continue to under-perform its peers. My original investment thesis and the related articles are:

http://www.investorhives.com/msgd.php?msg_...
http://www.investorhives.com/msgd.php?msg_...
http://www.investorhives.com/msgd.php?msg_...

The stock seemed to trend higher over last two months and was at one point was poised to break above $80 level where the technical resistance may have occurred. But now it is once again trading below $70. At this level, I believe that the stock is a great buy (my target is $100). It is trading with such a low valuation that it is simply a shame to see the stock trading at this level. In my opinion, AMGN will make roughly $4.5 to 4.6 in 07 and probably over $5 in 08. As we enter 07, you are looking at this premiere biotech companies trading with PE of 15 based on 07 and PE of 13 based on 08 estimate. In 07, the stock would be trading with PE of bank stock and I believe this type of valuation will not last and the stock should be trading much higher from the current level. Momentum investors continue to ignore improving pipeline in the oncology area and the current diverse pipeline that is already generating multi-billion dollar revenue. Instead, it is keying on two major uncertainties that is all related to AMGN's EPO line of drug. First one (I already went over this in the previous article) is related to the Roche's competitive drug CERA entry into the US market. AMGN has sued Roche for patent infringement and AMGN has a good chance to prevail the lawsuit due to extensive patent portfolio in the EPO market. We will hear about the Judge's decision soon in the early next year.

Second uncertainty that is currently depressing the stock price is US Congress hearing on the EPO reimbursement policy. The Congress is conducting a hearing to review the medical reimbursement policy for EPO products and possibly look into way of offering bundled pricing system to lower EPO usage. This is a way of reducing the medical cost and as Democrats took over the Congress and they have affordable medical cost as one of their top initiatives, many investors are afraid that these efforts may lead to lower bottom-line performance for EPO line of products for AMGN. The hearing will take place tomorrow and I believe no near term action will take place on this front: even if there will be some kind of policy change, it is likely to take years to implement. Furthermore, CMS is very much likely to defend its position with current reimbursement policy and there could be no change what-so-ever to the existing policy.

In my opinion, the stock fell in anticipation of the bad news and the drop has fairly reflected the possible negative scenario. Consequently, the risk to award ratio looks good for the stock and current price looks really attractive for the long term oriented investors. Also from the trading point of view, I think AMGN shares now offer good entry point with a short to intermediate term outlook. As such, I recommend you step up and buy AMGN shares.

Now, I would like to preview what AMGN has in store at ASH. Although investors may continue to pay attention to what AMGN competitors are offering at ASH, I believe that most of these concerns are now reflected in the share price and AMGN shares may have bottomed. Following comes from Lehman report published on Nov 29th on 2006 preview of ASH meeting. Tomorrow I will go over GENZ and will also comment on PDLI in the near future.

Amgen's ASH will be quiet, in our opinion, with more focus likely on competitors, EPO being a perennial, Amgen has no denosumab data but we highlight Novartis's competitor, Aclasta (zoledronic acid) which will be featured in a number of posters including data on ONJ and how a new schedule can reduce its incidence.

AMG 531, Thrombocytopenia
Amgen will present 48 week data, on Monday at 1:45 PM, for 531 in ITP, there is also a poster evaluating platelet activation in healthy volunteers; platelet activation has been suggested as a potential safety issue with 531. Amgen has completed two phase 3 studies of 531 in ITP and we expect top line data shortly followed by a BLA in early 2007.

AMG-523, B-Cell Disease
Amgen presents data for its lymphostat/atacicept competitor. A poster on Monday includes clinical implications in the title and we have long thought that Amgen needs to differentiate 523 from the pack; we expect a phase 2 go/no go decision shortly.

AMG-386, Anti-angiogenesis
Amgen has no data for 386, its antibody targeting ang2/tie-2 interaction but we note two posters discussing the role of this pro angiogenic axis in AML (Sunday) and CLL (Monday) and could support a decision by Amgen to explore a role for 386 in hematology; to date there has been a dearth of data for anti-angiogenic agents in hematology, we note a couple of PTK787 posters at ASH; however, our European colleagues expect 787 to be discontinued by Novartis.

Erythropoietin Competitors
A poster describing CERA consumption could provide additional insights into its biology; we have long believed that CERA's perversion of the natural EPO-receptor recycling following ligand binding could raise some questions regarding safety. Other EPO competitors include Neose who will present data from a phase 1 study in healthy volunteers in a Saturday poster.

Thrombocytopenia Competition
Following presentation of impressive data for eltrombopag in hepatitis-associated thrombocytopenia at AASLD, GSK will present ITP data orally (Monday 1:30 PM). We expect strong data from this randomized double-blind trial and while Amgen will likely get to market first with 531, eltrombopag's oral formulation will likely be favored by patients especially for chronic use; although this is where long-term safety which is as yet largely unknown is critical. Newcomer AKaRx will present data from another small molecule oral thrombopoietin agonist, AKR-501, which is currently in phase 1 testing in healthy volunteers (Monday 2:00 PM). We also note that Genzyme will present phase 1 data for the anti-CD16/CD3, GMA-161 in ITP, in a Saturday poster; GMA-161 was developed by Macrogenix.

CELG: Setting all time high ahead of ASH.

As I have promised, I will highlight what CELG is presenting during ASH. I will do the same for GENZ and AMGN tomorrow. Ahead of ASH, CELG is hitting all time high today: the stock is now racking up impressive 190% return in one year and a half since our coverage of the stock on 6/28/05 at slightly over $20. Ahead of ASH that starts on Friday, Smithbarney raised the target for CELG shares to $70 from $58. The firm maintains buy rating on the stock. The justification of the target raise was the faster than expected sales of Revlimid for MDS and MM treatment. In addition, the firm sees much slower rate of decrease in Thalomid sales. With this estimate, firm sees the revenue that will exceed 2 billion with EPS in the range of $1.70 for 08 (As we enter 07, 08 estimate will be used for forward PE). So target of $70 implies PE of slightly greater than 40 which is not unreasonable given the fact that the company revenue is ramping with the growth rate greater than 70% through 2008 ( puts PEG ratio well below 0.6).

Again this estimate is based on the Revlimid sales in the targeted MM and MDS market in the Europe and in the US. CELG is waiting for European approval of Revlimid in early next year. So in order to justify the current valuation, European approval must be granted, which I believe it will happen given the safety profile and efficacy of Revlimid. If Revlimid is only targeted for MM and MDS market, then the story for CELG may be nearing its end. But it may be far from the truth.
Revlimid is now being evaluated for CLL and NHL which represents 600 mil and 4 billion markets respectively. These two markets represent more than 2X the revenue opportunity for Revlimid for MDS and MM market. The initial trial data on CLL looks very promising. In fact, some firms are now taking off the label sale of Revlimid into the earning estimate for CLL. NHL data is still in very early stage. We will hear more about the Revlimid indication with respect to CLL/NHL during ASH. If CELG successfully makes in-road in CLL/NHL market, the revenue of the company may be in the range of 5 to 6 billion and at the operating metrics of 30% (standard for large biotech company), the company EPS can bump upto $5 a share. This simply means still large untapped potential for share price appreciation remains. CELG is next AMGN and DNA if Revlimid can continue to penetrate into new applications. This is why investors may remain excited as we head into ASH and wait for favorable trial data.

Another interesting point about CELG is its extensive patents on Stem Cell technology. As Democrats now control the Congress, I believe there will be more push towards investing and developing Stem Cell technology to cure many neurological degenerative diseases. The company such as Geron is now being viewed as a beneficiary of this possible trend in the future (increased government spending in the stem cell research). If this pans out, CELG will also be the beneficiary of this trend. So we have another source of investor enthusiasm that may help to push share price higher in the future.

Now following is the highlight of CELG presentation with each dates specified for different presentation of trial data. Again the source for the next paragraph come from Lehman report published on Nov 29th to preview the ASH meeting.

Revlimid continues to be one of the higher profile products at ASH with a number of Important oral presentations:

Monday 8:15 AM and 8:30 AM, long-term data from MDS phase 2 studies;
Monday 11:30 AM, final data from the phase 1 Revlimid/Velcade combination study in R/R MM; phase 2 studies in 1st line and R/R disease have been initiated based on these phase 1 data;

Monday 12:00 PM and 12:15 PM, single agent activity in R/R CLL, this is an update of data that has been discussed over a couple of years and while CR's are impressive the data to date has been difficult to put into context; CELG is planning a series of pivotal studies in CLL;

Monday 2:00 PM, single agent activity in NHL, like the CLL data these are intriguing and registration studies are being planned to quantify the benefit of Revlimid in NHL;

Tuesday 9:30 AM, initial data from the phase 3 ECOG study comparing high dose
and low dose dex combined with Revlimid in 1st line MM will provide important safety data;

Tuesday 9:45 AM, Phase 1/2 1st line data for Revlimid combined with Memphian
prednisone. Celgene is also expected to present data for Thalid in MM including data comparing Thal/dex to VAD as a pre-transplant induction regimen in the 1st line setting as well as an update from the pivotal 1st line Thal/dex vs dex study.

CELG, AMGN, GENZ, PDLI: FilthyRich biotech issues at ASH

The American Society of Hematology (ASH) meeting kicks off on Dec 9th (coming Friday) and will last through December 12th. This meeting is one of the very prominent medical conferences in the area of blood related disease and many biotech companies are expected to reveal trial data of their pipeline at various stages. Promising trial data may excite investors and can possibly trigger share price rally. Typically in the past, biotech companies with high visibility in the meeting saw their shares appreciate prior to the meeting. If the rally is significant, the shares usually pull back at the end of ASH meeting. However, if the trial data reveals significant new opportunity, the share price may continue to firm up.

All four biotech companies covered in FilthyRich group have presence at ASH to a certain extent. Out of four, I believe CELG will have the strongest presence followed by GENZ. I believe CELG and GENZ shares could see nice rally this week towards the beginning of the ASH conference. For CELG, Revlimid will be highlighted for R/R MM in combination with Velcade for both early and late line of defense. Also phase 2 data of Revlimid on CLL and NHL could be available. Promising data on CLL/NHL could be a huge boost to the share price. So pay close attention on this development. GENZ seems to have come up with very impressive pipeline in the hematology area. GENZ will feature early trial data on Clolar, Campath, GMA161 and Mobozil. GENZ is very good stock to own in my opinion due to very diversified product portfolio. PDLI introduces its new development product, an antibody targeting CS1 on MM cells. PDLI is a small-mid cap biotech company that I have not gone over yet with you. I will outline PDLI in the near future along with GENZ. AMGN will have some presence but the focus for AMGN will be more on what competitions will present during ASH. AMGN share have been weak lately due to concerns over on-going medical reimbursement review (for EPO product) at US Congress. I continue to believe that AMGN shares are severely undervalued and for a long term investors who are looking for steady growth without crazy risk factor that biotech companies may represent for some investors, this company is a compelling buy.

For AMGN, GENZ, and CELG, I will cite the summary of what each company are presenting during ASH in the following message in the next couple of days. The source of my research was Lehman report that previews upcoming ASH. The report is over 60 pages but if you want to view the full report, email me using investorhives.com mail and give me your email address. I will be happy to share the report.

Amid uncertainty over the slowing economy and possible earning slowdown among many economically sensitive US corporations, I believe that the US large cap biotech companies offer great place to weather the pockets of turbulent times that you may see ahead. Also these companies sell many drugs abroad especially AMGN. For CELG, EU approval on Revlimid will even increase the revenue growth rate and the dollar is tumbling against Euro. Large cap biotech companies are weak dollar plays; weak dollar can greatly boost earning for biotech companies. In addition, large pharma needs biotech companies more than ever to sustain their drug development efforts and to grow their earning. PFE screwed up big time by announcing termination of the drug development efforts with one of the most highly touted cholesterol drug. This may create some serious ripples among pharma sector tomorrow. In my opinion, large pharma will be on the hunt for several small to mid cap biotech companies. This will make the biotech sector one of the most exciting sectors to invest in coming times. The risk is certainly greater than other sectors with biotech issues. I continue to believe that we can reduce the risk by aligning our investment choice within this sector with large cap issues with significant products in the pipeline. And then choose one or two small issues to speculate for the major upside movement.

I continue to believe that every investor should have some exposure to biotech sector.

Tivo: Respectable Q but unrespectable guidance.

Tivo reported the earning after the market close on Wednesday. Heading into the earning, I thought the company had manageable expectation that had a fair chance of being exceeded. Hence I thought the stock was a trading buy.

(see http://www.investorhives.com/msgd.php?msg_...)

From the today's stock action, this turned out to be a blown call. Let us fast-rewind the tape and review what has occurred. As expectedly, Tivo delivered respectable top-line and bottom-line performance. The revenue came in at $65.7 mil, slightly ahead of the consensus estimate. EPS loss was at 12 cents, 3 cents better than the consensus loss estimate. Operating margin was ahead of some analysts' expectation, coming in at -18.7% versus ~ -25% expected. Tivo also announced DVR software deployment deal for Cablevision Mexico with 500K subscribers in the middle of 07. These headlines alone would have caused the shares to trade slightly higher, which it did just after the earning was released.

Then the investors took the notice of the next Q guidance. Although heading into the earning with low expectation, the company still managed to disappoint the investors with the next Q sales guidance. As the Christmas holidays are the seasonally the strongest time of the year for Tivo sub adds, the investors wanted to hear that the company will be aggressively accumulating as many as subs as possible (even at the expense of significantly higher marketing cost). This was also my expectation but it was not the case. Tivo guided for subdued sub add outlook. Yet the company was still guiding for the significantly higher operating expenses. This aspect may have been very puzzling for investors. The investors wanted to hear more aggressive sub add efforts at higher marketing expense. Or they could have been also happy with more profitability with less marketing expense. Somehow, Tivo seemed to have done something that is not very intuitive: less sub add with more operating expense. This was the source of the investors' disappointment and the stock tanked by nearly 10% today.

What may have happened was management's attempt to kill the two birds with a stone, a strategy which backfired on the stock price performance today but is not completely unreasonable. Tivo is fighting with two major uncertainties: timing of the network-wide Comcast deployment and resolution of the litigation against Dish. Tivo needs to ensure that Comcast relationship can generate meaningful sub adds for the company to expand its sub-base large enough for more effective ad opportunity. However, the timing of this event is rather uncertain. First, Comcast will have go through testing phase of Tivo software till early 07. Even after Comcast start marketing Tivo software by the middle of 07, it may take some additional time for the subscribers to readily accept Tivo product and Tivo software to gain momentum within Comcast subs. Cox deployment may even take longer than Comcast. Till then Tivo will continue to burn the cash and as such the company may want to minimize as much cash burn as possible.

Yet at the same time, the company may want to add respectable number of standalone sub adds (since it has the highest profitability) during the seasonally the strongest time of the year. So it is still spending fair amount of money to entirely subsidize the single tuner Tivo box (predicting loss of 30 ~ 35 mil and the company has slightly greater than 106 mil in cash). In a way, it is preferentially clearing out the old inventory as people will clearly have more inclination for the single tuner version with no hardware cost. Notice Tivo is raising upfront cost for the dual tuner DVR to $69 with higher monthly fee. However, longer term commitment (3 years) will yield significantly lower monthly fee (slightly less than $9 and is actually cheaper than $10 that the most cable providers are charging). So if people still opt for dual tuner this holiday season, all the revenue will be the upside surprise: the company thinks most of the hardware sales will be the single tuner because of no hardware cost (entire amount given back in the form of rebate). This is company's attempt to still experiment with the pricing plan to understand the consumer preference for more effective marketing and at the same time to yield respectable standalone sub adds during the holiday season.
So the company is trying to limit cash burn while adding reasonable number of new subs and in the process ended up guiding more subdue sub add outlook with higher operating expenses. Am I really disappointed? Well with the stock price movement Yes�� But with respect to what the company is doing, I can care less. This is because in order for Tivo to become a viable and thriving entity, the company must see two events with favorable outcomes: patent litigation against Dish and Comcast deployment. Yesterday's earning outcome and subsequent stock movement will be a noise compared to that you will see as a result of the litigation and effectiveness of Comcast deployment. These are two events that investors must pay attention. If none of these events pan out favorably for Tivo, I am going to bail out of the stock. Until then I am going to continue to speculate on Tivo on the long side.

Due to tremendous technological leadership in the DVR space and synergy with the advertisement product, in the worst case, Tivo will be bought out and become a division of Comcast. Even in this case, I believe that there could be a fair amount premium from the current share price (given how well Comcast share price is doing these days). In the best case of successful litigation outcome and rapid sub add growth from the MSO deals, the shares could be trading significantly above the current level. I am hoping that it would be the latter case. But so far investors are betting that it will be the former.

FMCN: all time high; WR Hambrecht initiates with buy

FMCN hit all time high level today, breaking above $70 level. I have said in my previous message that despite the stock advance after the assuring Q3 earning, the stock should be bought.

(http://www.investorhives.com/msgd.php?msg_...)
(http://www.investorhives.com/msgd.php?msg_...)

In my opinion, as investors feel more confident about the company revenue growth and expanding operating margin, the stock will continue to rack up impressive gains. This may be especially so as the US economy is slowing down and earning pictures for economically sensitive companies will likely to be cloudy in the coming times. Chinese economy shows much better growth potential and as things in the US get turbulent, investors may look outside the US for better growth opportunity. Consequently, I believe some exposure to Chinese stocks may be a shrewd idea. In our group, we cover CTRP and FMCN as two ideas that may benefit from great Chinese economic growth story.

(http://www.investorhives.com/hived.php?hiv...)
(http://www.investorhives.com/msgd.php?msg_...)

Today WR Hambrecht initiated the stock with the buy rating with the target price of $85. This coverage may have served as the positive catalyst to push the stock price higher. The firm noted that Tier 1 city network expansion is maturing and the critical mass has been attained. This will set the company up nicely for the improving operational margin. The firm cites expanding opportunities in the Tier 2 cities as the next source of robust company revenue growth. The research report outlines in-depth various segment of the business which includes in-store, Framedia, in-moving advertising, outdoor as well as mobile. Although mobile is currently very small portion of the overall business, its potential is enormous as China has the largest world population and everyone will carry cell phones sooner or later. (if you want to view the report, email me using investorhives.com mail and let me know the mail address: I am willing to share the report.)

The firm expects 40% sequential revenue growth on YOY basis till 2009. For 2009, the firm predicts the revenue roughly in the range of 600 mil with EPS estimate of $4.62. So by sometime in 2008, amid excitement over 2008 Olympics, the share could be trading as high as $140 if the investors are willing to give PE of 30 based on forward earning in 2009.
Although this is very forward looking statement, the whole point of this exercise is that FMCN has plenty of growth ahead.

Although China is risky proposition and FMCN does have plenty of speculative elements, I believe that the business proposition that FMCN is undertaking is compelling. I believe that the growth prospect and earning power of this company will continue to excite investors as we near 2008 China Olympic. As such, I think risk tolerant investors, investing with FMCN could be very rewarding.

Tivo: buy the pessimism and sell the optimism.

Tivo, one of the speculative stocks, covered in FilthyRich stock list reports earning after the market close tomorrow (Wednesday 29th). Tivo appeared to have finally established steady uptrend in the middle of this year after winning the patent litigation against Dish Echostar. The company won the injunction, which ordered the immediate termination of the service of the DVR that infringed on Tivo patent. However, after the stay of the injunction by the appeal court, investor's hope that Tivo may leverage the court win to strike many additional business deals with the cable providers slowly deflated. And at $6.28, the stock is now trading at the lower end of the trading range between $6 and $8.

Heading into the earning, Tivo have low expectation in my opinion. Investors now know that the patent litigation won't resolve in the near term and may last longer than a year. Because DVR service deployment with Comcast and Cox is still some time away, investors now expect that net sub add this Q will be minimal. Also investors expect heavy operating loss as the company has recently launched new HDTV DVR platform and there could be significant hardware subsidy cost. Also heading into the holiday season, investors expect more expense coming from the more aggressive marketing campaign. In my opinion, risk to award ratio for Tivo has turned favorable as investors do not put too much expectation on the company's performance this Q.
There could be some mild positive surprises this Q. Surprise may come from higher than expected sales Series 3 HDTV DVR. There are many avid existing Tivo DVR users and they may have upgraded their DVR to new Series 3 DVR. This may resulted in higher than expected revenue. In addition, I have noticed from alexa.com that the traffic to tivo web site in the middle of Sept has spiked to the near record level. This time frame coincides with the introduction of the new series 3 and the initial sales by the new subscribers may have been also greater than expected. Another positive surprise may come from ad revenue. Although they are very small part of the overall revenue at this point, the margin is really good for this line of business. Along with continued tight expense control, Tivo may be able to deliver upside surprise in the bottom-line (loss is expected due to higher than expected expense associated with new product launch).

Tivo is heading into seasonally the strongest Q of the year. As such, I expect that the company will be optimistic about sub add aspects this winter. In addition, Comcast deployment will start early next year, solidifying the sub add outlook. Also the management may picture more enthusiastic stance on the ad business. Today Tivo announced that the company is going to add targeted commercial at the end of the recorded TV programs and measure the commercial viewing by the people. These factors could serve to boost the share price after the earning.

Unless Tivo gets positive outcome from the appeal litigation process, the stock is likely to be kept in the trading range between $6 and $8. However, heading into the earning with reduced expectation, I see a little trading opportunity. If you consider squeezing out 5 to 10% upside from Tivo, I think buying ahead of earning may be the play. If this really pans out, make sure you do take the profit.

Good luck,

GS (Goldman Sachs); golden opportunities ahead.

GS was initated in FilthyRich 2006 stocklist on 11/05/05 at $126 a share. In one year, the stock has generated stellar gain for the group with near 60% gain. The stock is knocking on the $200 door. Original target price for the stock was $160. Due to tremendous revenue upside generated from the commodity trading in the first half of this year, we bumped up the target to $200. Now I am revising my target to $230. Due to record M&A activities in the US and hot IPO deals abroad especially in Asia, GS is on the verge of delivering another record blow-out Q. I don't have time and too tired from work to list all the details to back this statement today. Over this Thanksgiving holiday, I will write up a more detailed analysis on GS upcoming Q results in mid-December.

But simply put, there could be as much as 30 to 40 cents upside to the current EPS estimate and GS may deliver near $20 EPS (not a typo) for 2006. This puts the stock at PE of mere 10 even at $200 level. People assume that GS cannot sustain this level of performance and estimate that the earning could fall in 2007 but this may not be the case. While earning cannot sustain this level of growth, I believe it will not fall next year much from the current level.

Towards the earning in mid Dec, I believe that the stock will decidedly break above $200 and rally significantly higher in anticipation of the great results. As such, I believe that now is the time to load up on the stock.If the run-up is great (to near my target of $230), we can take some off the table. If the rally is not quite as strong as I anticiapte, then we can hold the stock through the earning result. I believe the earning will be great and will be above most aggressive analyst estimate out there so if the stock do not run up, it will react very positively to the upside.

GS has shown golden performance for FilthyRich group to date. I believe it still has the golden opportunities ahead and we can stick with the stock despite the substantial gain we have to date.

FMCN (Focus Media): focus on the improving margin

Focus Media reported earning after the market close on Monday. Heading into the earning, many nervous traders sold shares as the stock close down by a couple of percentage point to $59.86. I outlined some of investors’ concerns heading into the earning but did see continued strong growth in the topline number and possible earning upside due to an improving margin trend.

(see http://www.investorhives.com/msgd.php?msg_id=218)

FMCN put all the investors' concern into rest by delivering solid topline performance and exceptionally strong bottom-line results. The revenue came in at 61.1 mil slightly above 59.7 mil expectation. The EPS results blew away the estimate by healthy 6 cents, coming in at 55 cents on a Non-GAAP basis. The guidance was even stronger. The company sees the revenue number somewhere between 67 to 69 mil for the next Q. And it sees the EPS number somewhere between 62 to 64 cents, significantly above the current estimate of 56 cents.

The theme of this earning call is the improving gross and operational margin of the company amid the brisk revenue growth. The company has been deploying its LED flat panel network (commercial, in-store, etc). As these build out of the networks are largely complete and as they generate revenues, the gross margin is improving. The company improved the gross margin by whopping 640 bps to 65.3%. Even more impressively, the company is forecasting the GM to achieve mid 70% level long term. OP ex margin is going up even faster, up by 820 bps to 44.9%. As the current tax rate is only 5% for the company and this rate remain at this level for the entire 2007, the net profit margin could exceed 40%!!.

The company thinks it can achieve 20% Q to Q growth. If you extrapolate this for the quarters in 2007 with 40% margin, EPS estimate can exceed $3.5 and hence the current EPS estimate that some analysts are using are way too low. In this optimistic scenario, the share can reach $100 as we head towards 2007. Ad market environment for FMCN will even look better as China prepares for 2008 Olympics. FMCN reports all ad space in Tier 1 cities are sold out till the year end and this trend is expected to hold also in 2007.

Due to rather strong earning results, I would expect to see momentum coming back to the stock and we may retest our high of $70 level soon. I would not be discouraged by steep share price rise and use any pullbacks to build position. If you bought some shares ahead of the earning, congrats to you.

Conclusion

Even conservative growth in the topline number still yields great EPS growth due to earning leverage. Depending how fast the revenue ramps up, FMCN is poised to be one of the most exciting China stocks along with CTRP that we cover in FilthyRich group. Maintain $80 target but it appears as though this target is very very conservative number.

FMCN: Buy as it heads into managaeable expectation

Focus Media (FMCN) was just initiated in FilthyRich 2007 ideas. The company reports Nov earning results after the market close tomorrow (Monday 20th).

FMCN is a Chinese media/ad company. In 2003, the company successfully transformed itself from an advertising agency to an operator of out-of-home advertising network. The company targets ad markets based on flat panel displays in commercial building network, in-store network, and other outdoor LED network. The company recently pushed its business into poster frame network and mobile handset network. Last two years, the company went on a torrid acquisition trail, gobbling up many small players in this space and defining new business based on the flat panel displays. Now FMCN owns 90% market share in this ad segment and has near monopoly-like position. The revenue growth, via both organic and acquisitions, have been outstanding. In 2004, the company posted topline number of 29.2 mil. In 2005, this number grew to 68.2 mil which represented ~135% growth. In 2006, the revenue number is estimated to be 212 mil which represents whopping 210% YOY gain. In 2007, the current estimate is 346 mil, which would be about 63% rise from 2006 level. Although the growth rate will likely to slow down from the current torrid pace, it will still remain above 40% level for the foreseeable future. 2007 EPS estimate is now at $2.60 but there could be upside as the margin could improve as the acquisitions are digested and the synergy kicks in. At the current price of $61.73, it is trading with PE slightly greater than 23. With growth estimated to exceed 40%, PEG is 0.6 and the valuation looks attractive for the risk tolerant investors.

Although the shares have risen more than 200% since its IPO in fall of 05, the stock has done nothing since June of this year. In fact, the shares have seen steady decline over last several months. What is causing the stock to lose steam? In June of 06, there was a secondary offering of shares which did not please the investors. Last earning call was also less than enthusiastic with the management being cautious about the future guidance. In addition, Wal-Mart buying Trust-Mart, a FMCN customer casted doubt whether Wal-Mart would renew relationship with FMCN. However, it is noted that Trustmart represent only 1.3 % of the total revenue. There has been some concern about increased competitions from Oriental Pearl and BAMC. There has been talk about increased lease cost on the commercial building display site which will have negative impacts on the bottomline. Finally, CEO's selling call option of the company and buying put options (involving 2m of his own shares) weighed heavily on the stock price.

Due to this negative events that has unfolded last two months and cautious management guidance on the upcoming Q, I believe that the shares are heading into the earning with the reduced expectation. Normally, high flyers stocks need to beat the earning expectation by a solid margin to sustain its upward momentum. But for FMCN, just slightly beating the estimate may trigger relief rally and hence I see more room for appreciation near term. I believe that some of the shares that you want to purchase can be bought ahead of the earning on Monday before the market close.

In case that the earning just meet the expectation and the shares sell off somewhat, I think that would provide us with a nice chance to average down. Long term, as we near the 2008 Chinese Olympic, I expect the Chinese display market to be very vibrant. With more network deployed as the time progress, room for the margin expansion is significant. Better margin among higher business volume means a lot of earning for the company and happy smiles on the shareholders.

New ideas for 2007

Adding six new ideas for FilthyRich hive,

Dear members,

I am adding six new stock ideas for 2007. Currently FilthyRich hive has 13 stocks in biotech, financial, tech and china sector. In November of every year, I add stocks that look promising for the upcoming year. In late Dec and early January, I remove those that the original investment thesis does no longer apply or upside (if we are long) or downside (if we are bear) potential has been fully realized. We also have a midyear review process in July when we make additional adjustment in the stock portfolio.

FilthyRich group was started back in 2003 as a small yahoo group to share my investment opinions with a few of my friends. Since then, we had a great success with some stocks and made some nasty mistakes along the way. We do think we have learned from those mistakes. But I have a feeling that I will be make many more in my investing experience. Scott has asked me to take filthyRich group idea one step further and asked the group to be open for all those who wants to learn about investing by making the group available at investorhives.com. I have gladly accepted his offer. I believe in the power of number when it comes to investing. I believe that FilthyRich group can serve as a discussion forum for stock ideas and we can interact together to refine our ideas together. More people interact and more fined our idea will be and better it will reflect what is truly happening in the market. I believe that this will help us in making better educated guess when it comes to picking the right stock.

Here are six new ideas: IBM, AMR (American Airlines), LUV(SouthWest airline), RIMM (Research in Motion), PEET (Peet's coffee), and FMCN (Focus Media holding).

To accommodate AMR and LUV, I will create FilthyRich transportation idea section in the group. Also FilthyRich specialty retail idea section will be added to accommodate PEET. FMCN will be added under current China ideas and IBM and RIMM will be included in the current tech ideas. In Dec and January, I will be removing some stocks in the tech and biotech names to make a room for these new additions. Many will come from tech ideas. I believe that strong year end rally should be used to lighten up on some tech names; due to moderate slowdown in the US economy, earning picture for some tech names have become rather cloudy but rising stock price in many tech names makes the group more vulnerable for pullback in early 2007. I will inform you on what names to drop from the list but it won't be all at the same time as I want to maximize the performance for individual names.Here is a brief summary of the investment thesis for new ideas. I will provide more in-depth analysis as time goes by. I will do my best to do this as timely as possible but sometimes day time job makes that almost impossible.

1. IBM (initiated at $93.81 on 11/19/06, Target: $120, long)

The story behind IBM is slowing productivity of the US economy and rising wage trend. US corporations have not been spending a lot of money in upgrading their IT infrastructure. This trend is apparent in productivity number that is leveling off. Also there is an increased pressure in the wage front. This may signal more difficult earning performance for many US corporations, especially as the US economy slows down. Fortunately, many US companies are sitting on healthy cash level. Next year may be the time for these companies to spend on upgrading IT infrastructure. And as a premier IT service company, IBM may benefit from this trend. In my opinion, there could be more than 10% upside surprise in the earning for 2007 and multiple may expand to 17 to 18 level as the large cap issue may be in vogue with the money managers. Hence, $120 is my initial target. ( 17~18X $7 2007 EPS).

2. AMR (American Airline) (initiated at $32.32 on 11/19/06, Target: $48, long)
3. LUV (SouthWest Airline) (initiated at $15.83 on 11/19/06, Target: $21, long)

In my opinion, Airline companies will face significantly improved business climate heading into 2007. I believe that crude oil will dip below $50 after the cold winter season. And it will stay somewhere between high $40 and mid $50 in 2007. With dissipating speculation in the oil commodity, slowing economy, and Democrats who will talk about the alternative energy to death, I see falling crude price even below the current level. Many analysts estimate EPS for airline companies based on mid-60 oil price for next year. Also there have been many mergers within airline industry who took out more competitions. This will lead to improving airfare pricing for the whole industry. I see 50% upside from the airline shares from the current level. AMR has an extensive national netwok and LUV is a well-run regional carrier. Let us keep those two names and study the airline stocks in 07. With LUV, Alex in House_Always_Win hive may go over some trading opportunities with options.

4. RIMM (Research in Motion) (initiated at $133.61 on 11/19/06, Target: $95, short)

Alex presented several arguments why RIMM is a short. I do agree with him. Many believe in the perfect scenario for RIMM: new consumer product PEARL taking off, gaining wide acceptance quickly, and seeing dominant competitive position. I just don't see RIMM blackberry having the same appeal to the emotion as Apple iPOD. And with several competitive threats from NOKIA and Motorola, I don't see the excitement lasting long for RIMM. Short term, the stock may continue to rise as the tech sector is seeing great buying interest. One analyst just has upgraded the stock with the lofty target at $160. Let the stock run up and euphoria get to the moon. Then short the stock towards RIMM earning. I am sure you will hear from Alex on this one before me.

5. FMCN (Focus Media) (initiated at $61.73 on 11/19/06, Target: $80, long )

FMCN is a Chinese media company which specializes in display ad market. The company markets ad on various flat panel displays on the commercial building, movie theater, ect. The company has acquired several companies in the last couple of years to own 90% of the highly profitable display ad market. The company revenue growth has been impressive. In my opinion, the topline growth rate will continue to exceed greater than 40% on a YOY basis. Furthermore, as the company becomes more mature, its spending associated in deploying the display network will subside and there is a great upside to the gross margin. FMCN falls right into heart of the China growth story and I think you could use the stock weakness to build position.

6. PEET (Peet's coffee) (initiated at $26.75 on 11/19/06, Target: $30, long)

I think PEET is a viable coffee alternative to Starbucks. Coffee industry is in a long term growth path. While our dad generation loved to drink beers, my generation is into drinking wine and coffee. Over last five years, PEET has shown very consistent YOY topline growth. The company has been using most of its profits into aggressively expanding its store network and adding coffee roasting facility. While SBUX approaches the coffee consumers with beverage concept, PEET has been emphasizing on the bean concepts and appeals more to true coffee aficionados. Although it will not have the wide appeal as the SUBX franchise, I believe PEET will garner very strong and highly profitable coffee niche market. Don't expect the share price to show you an immediate return but if you stick with it for a long haul, I think you can come out with a nice gain.

Good luck,

CELG: Volatile: this time to the downside

CELG announced yesterday after the market close that it will be issuing additional 20 mil shares. The purpose of the dilution is related to the S&P requirement (CELG was added to S&P 500 index very recently) to maintain the stock float at a certain level to increase the liquidity of the stock. The company can achieve this either by doing the stock split at a certain ratio or by issuing additional shares. The company chose to do the latter. Of course, this will have a dilutive effect on the share counts and investors are not pleased by this choice.

On the other hand, at CELG share price, issuing of 20 mil shares will add close to 900 mil to the cash position. CELG already has roughly 750 mil in the bank and additional cash generated from issuing new shares will take the cash position to the level greater than 1.6 billion. This will generate substantially higher interest income and will have offsetting effect on the possible decrease in the EPS estimate due to share count dilution. Having extra cash also helps the company to be even more aggressive in terms of developing new drugs and taking the pipeline into full commercialization. If the company ramps up the revenue more quickly than anticipated, this will more than offset the slight EPS decrease estimate associated with the share count dilution.

As CELG shares trades with high premium, investors tend to over-react to any hint of negativity. Revlimid story is just beginning and I do see substantial upside to the stock price even from the current lofty level. I recommend that you do stay disciplined about the entry price as the stock has high volatility. But so far over the last two years, correction in the stock price has been the gift for CELG longs.

CELG: added to S&P 500.

CELG is getting an additional boost after-market after the announcement that the company is added to S&P 500 index. CELG is replacing AmSouth and is trading higher by 5.3%. As I outlined in my previous message, CELG is on a hot growth trail. The company is soon to be multi-billion dollar company and today's S&P 500 addition acknowledges that growth aspect. Being listed in the S&P 500 causes CELG to be covered in many index and mutual funds that emphasizes this index. This tends to fuel buying interest which can propel the stock price higher in the near term. As CELG has been one of the best performers in the biotech index this year, I believe that many fund managers may become interested in covering CELG.

Aside from the being added to S&P 500, I believe CELG along with other biotech companies (AMGN, GENZ, and PDLI are also covered in the FilthyRick Hive) are poised to outperform the market in the near term. Biotechs are entering into the seasonally strongest time of the year. Towards the year end are packed with many medical conferences that outline drug development trial data. Biotech stocks tend to be news driven as the investors seek to assess future earning potential of the company with favorable indications from FDA drug trials. In particular, CELG will have a strong presence at ASH (American Society of Hematology) in December of this year. Heading into this conference, we may expect relatively stronger performance of the stock as investors anticipate many favorable trial data for the drugs in the pipeline.

Other than the catalysts stemming from the update on the drug pipeline during the medical conferences, biotech stocks also have very strong fundamentals. Unlike the bubble era we had seen in late 1990's and early 2000's, most mid to large cap biotech companies now have real earning with great growth potential; their research investments are finally bearing fruits. After seeing some buying interest in the sector in 2005, biotechs struggled in 2006 as the hedge and mutual fund managers overly emphasized the energy and commodity sector. As the energy and commodity hype dissipates (yes, global economies are slowing down as evidenced by many countries' economic indicators), the money is rapidly being rotated away from the energy and commodity sector and being put into somewhere else. I believe the biotech sector may be a beneficiary of this trend. Biotech stocks are not exposed to economic cyclicality and earning growth aspects are not in question. The companies in economically sensitive sectors such as retailers, industrials, housing, commodities, as well as transportation may face uncertain earning outlook. In fact, many biotech companies' earning growth is accelerating as their products are marketed for the large untapped area of oncology, hematology, immunology, etc. Biotechs' PE and PEG ratio are currently much lower compared to what they have been historically. These sound industry fundamentals are likely to serve as a safe haven for investors in this uncertain market condition. CELG may also benefit from this trend.

After the market close, Merck announced that it is paying 1.1 Billion to purchase small biotech company called Sirna Therapeutics (RNAI). RNAI is up near 100% as MRK is paying hefty premium. As large pharmas look to biotech companies for acquisition targets to fuel their growth and as biotech earning outlook continues to solidify, biotech companies should see exciting times ahead.

CELG: sailing smoothly on the ship of Revlimid.

CELG is one of core biotech stocks covered in FilthyRich hive along with AMGN, GENZ, and PDLI. CELG had a huge run-up last week after reporting stellar earning results last Thursday pre-market. CELG has hit a new all time high on Friday. We had CELG covered in the thread since 6/28/05 @ $20.38 (split adjusted). At current price of $50.33, the stock is generating 147% return in 16 months.

CELG falls completely in the opposite spectrum of AMGN in terms of investment thesis. While I think AMGN's value makes the stock attractive for a long term idea, the growth is what CELG is all about. CELG is currently undergoing the fastest growth of the top-line number in the company history due to rapid uptake in its blood cancer drug Revlimid. This quarter's number was impressive. Top-line revenue number came in at 245 mil versus the consensus number of 231 mil. EPS number was 15 cents which was a penny ahead of the consensus number. SG&A number was much higher than expected at 67 mil versus mid-50 mil that some analysts were expecting. This is due to aggressive marketing efforts that the company is making in promoting Revlimid. Despite the higher expense, CELG was able to beat the expected EPS number. Revenue number was 89% higher than the same Q a year ago and net income grew by eye-popping 3000%.

On the trailing basis, the company is trading at PE greater than 90 based on consensus mean number of 868 mil revenue and 53 cents EPS. So am I crazy to recommend CELG shares at this lofty price? Although I am not sure what the stock will do near term, I believe that there is still a plenty of upside left for the stock. Revlimid is approved for 5q-MDS (myelodysplastic syndrome) in January of this year and multiple myeloma in June of this year. Revlimid is projected to bring in close to 700 mil in the US and Europe for MDS treatment in 2009 (as we near 07, people will pay attention to 09 estimate: biotech stocks typically look at earning two years out and pipeline story for stock price estimate). In addition, MM treatment in 2009 may exceed the sales of 1.2 billion for CELG. Revlimid will be a blockbuster drug for CELG. The drug commands supreme pricing with the cost exceeding $60,000 for 5q-MDS treatment and $27,000 for MDS treatment. As such, the company can achieve gross margin above low 90% with Revlimid and the company may be able to demonstrate op ex and net margin number greater than 50% and high 30% range respectively in the future. If we add the sales number of existing drug Thalomid, the company is poised to achieve revenue number greater than 2 billion by 2009. With assumed net profit margin in the high 30% range, EPS can exceed $2.2. If the company earning growth is expected to grow by 50% over next 5 years, it may not be unreasonable to assign PE somewhere between 30 and 40. Taking more conservative approach with PE of roughly 30, the company valuation could exceed $65 a share by late 2007. Remember this is only assuming Revlimid's penetration in 5q-MDS and MM market and with the approval in Europe for these treatments which looks increasingly likely in the first half of 07.

But the story for Revlimid is just beginning. Outside 5q-MDS and MM market, CELG is actively evaluating Revlimid for non 5q-MDS, NHL, CLL, sciatica, and CRPS. These markets represent multi-billion dollar revenue opportunity for CELG. In particular, revenue opportunity for CLL and NHL market can be as large as 500 mil and 2 billion dollars.

Outside Revlimid, CELG has plenty of potent line of future products in its pipeline. CC-4047 addresses the new areas such as myelofibrosis, small cell lung cancer, as well as sickle cell anemia and B-thalassemia. CELG also has follow-on IMid CC-11006 in Hematological malignancies and is working toward a clinical development plan for CC-10015. Finally, CELG is actively evaluating oral PDE-4/TNF alpha inhibitor, CC-10004 for psoriasis, psoriatic arthritis, and rheumatoid arthritis. In next month of Nov, there is a major hematology conference (ASH) where CELG will present many data for Revlimid and early trial data for the drugs in the pipeline. Promising data is likely to further propel share price higher as CELG's market opportunities rises exponentially.

In summary, no large cap biotech company is likely to show better growth potential as CELG. The share price may appear expensive but given the growth rate (likely to exceed 100% YOY over next 2 years and higher than 50% over next 5 years), the stock multiple premium is justified. Furthermore, analyst's estimation for initial penetration of Revlimid in 5q-MDS and MM is very conservative as the number lags that indicated by several medical surveys. This may imply significant near term earning surprise. Long term, CELG can tap into several additional markets with the products in the pipeline, significantly raising the overall top-line revenue opportunity.

The shares will be volatile but along some turbulent ocean waves, the ship of Revlimid will sail along smoothly, taking CELG franchise to nowhere it has gone before. I believe the stock will get to $60 sometime in the first half of 07 and we will revisit the company fundamental then.

Good luck to CELG longs.

AMGN: another outstanding quarter but still waiting for outstanding reception

AMGN reported the Oct earning results after the market close today. Total revenue came in around 3.6 billion roughly in line with the consensus estimate. On the bottom line results, the company reported $1.04 EPS, beating the consensus number by solid 7 cents. This Q, the EPO (treats anemia and boosts red blood cell counts) continues to generate healthy sales for the company. Aranesp sales exceeded 1 billion for the first time, coming in at 1.07B against the consensus number at 1.04 B. Epogen came in at 633 million against the 616 million consensus number. Combined sales of Nuelasta/Neupogen (boosts white blood cell counts, used in chemotherapy settings) roughly came in as expected at 1 billion. The sales of Enbrel which treats rheumatoid arthritis, psoriasis and other inflammatory conditions came short of the expectation at 703 mil versus 739 mil consensus estimate, reflecting more fierce competitive landscape in this market segment. The company also noted very strong ramp of new cancer drug vectibix to treat the mid to late stage colorectal cancer. Vectibix (formerly known as Pmab) will likely to be more meaningful revenue contributor as the potential market opportunity is thought to exceed 2 billion.

AMGN also notes low inventory levels for its EPO and Neulasta/Nuepogen products at its distributors, which pretty much ensures continued strong sales of these products in the next Q. As such, the company guides next Q sales to the upper range of previously guided range (14 to 14.3 billion). The company boosts EPS for 06 estimates for the next Q by 10 cents to $3.85 to $3.95 range from previously guided range of $3.75 to $3.85. AMGN is essentially doing $4 EPS and PE is only slightly higher than 18 on a trailing basis. In 07, I believe that the EPS will could exceed $4.60 to $4.70 level as the company continues to buy back shares and its oncology drug Vectibix ramps up. The company did half billion dollar worth of share buyback this Q at an average of $69 a share. This is an another indication that the company thinks that the shares are priced attractively. The company may allow additional share buyback programs in the future. In 08, we may be looking at EPS estimate above $5 range. At current price, the shares maybe trading with PE less than 16 on 07 estimate and less than 15 on 08 estimate. As we are nearing end of calendar year 06, EPS estimate for 08 will be the focus of the investors and as such, AMGN is clearly a bargain at the current price.

The reason that AMGN shares are depressed may be from the uncertainty related to the patent litigation against Roche. Roche is set to introduce drugs in the US that will challenge AMGN multi-billion dollar EPO franchise. FDA approval date for Roche is towards late Feb of 07. AMGN has filed lawsuit claim against Roche and the hearing is expected to start in Sept of 07. There is a strong chance that AMGN will file injunction against Roche before the FDA approval date so that the sales of the Roche's drug will not start prior to the actual resolution of the court trial. AMGN is attacking Roche on 6 claims. AMGN has to show Roche infringes on any of 6 claims on EPO products so some research firm such as SmithBarney continues to view AMGN's chance to prevail very favorably. In my opinion, AMGN share price will get a huge boost (10%) if AMGN wins against Roche in defending its EPO franchise.

With many of the oncology drugs in the pipeline and Vectibix ramping, AMGN never has been stronger in terms of new product position. AMGN has been beefing up on developing new drugs at a torrid pace. It is exploring extended markets for the existing drugs and plowing into various lucrative oncology products. This has caused AMGN's R&D expenditures to skyrocket; it is spending 30 ~ 40% more on the research and development from the prior year level. Yet its financial metrics are superb with operating margin in the mid 40% and net profit margin in the mid 30%. This is one of the premiere biotech company trading at a bargain. I continue to believe that as the concern of Roche litigation dissipates and the oncology product ramps, PE multiple will normalize to mid 20's and with estimated EPS of $4.6 ~ 4.7 in 07 and probably higher than $5 in 08, you can do your math to find the target price for the stock.