Morgan Stanley analyst Ehud Gelblum today argues for splitting Cisco Systems (CSCO) into three parts, an access business, an enterprise routing and switching business, and a service provider routing and switching business.

Gelblum, who maintains an Equal Weight rating on Cisco shares, argues that despite the mea culpa from CEO John Chambers last month, and the company’s statement yesterday that it is making sweeping changes in its internal organization, the company’s problems are really structural in nature, and that it cannot successfully manage “disparate” businesses with different margins and growth.

Gelblum’s analogy is the heavy truck industry: in the ’20s through the ’50s, the same companies made cars and trucks. That changed later with the divergence in manufacturing of both, where different steel alloys were required for each, different stamping processes, different wiring harnesses, etc. Emissions standards, too, forced car makers to back away from trucks. Today, cars and trucks “share as little as 10% of their base technologies.”

I’d observe that Cisco has always been, to my mind, a software company, not a heavy iron company, but that’s debatable, I suppose.

In any event, the access products at Cisco, for example, Gelblum notes, are declining in sales, including the Scientific Atlanta set-top business, and the Linksys home and small business switch brand. They have $16.2 billion in revenue, 50% gross margin, and 10% operating margin.

Enterprise routing and switching has single-digit revenue growth, $22 billion in annual revenue, 80% gross margin, and nearly 40% operating margin.

And service provider is a $16 billion business with double-digit revenue growth, 50% gross margin, and 10% operating margin.

“We believe Cisco could successfully separate into three pieces, which we expect to result in a) narrower end-market focus for each more closely aligned with a distinct end-customer; and b) improved alignment between revenue growth and margin targets.”

Without such a change, Gelblum thinks Cisco’s long term financial targets of 12% to 17% revenue growth and 28% to 31% operating margin are unrealistic.

Mind you, Gelblum thinks Cisco’s three parts are altogether worth $173 billion, 40% above the current price. But that’s assuming some things: for one, he values the enterprise business on a dividend yield basis, assuming the company could make $5.3 billion annually in free cash flow and pay out two thirds of that, for a 4% dividend yield.

If one is a patient investor, there’s upside. However, “We do not believe Cisco’s heads are there yet and so believe it is too early to buy the stock on this thesis unless one can be very patient.” Emphasis is Gelblum’s.

Cisco shares today are up 14 cents, or 0.8%, at $17.62.

Article courtesy of Tech Trader Daily

Shares of Baidu.com (BIDU) were up 1% in recent premarket trading following the Chinese search engine’s first-quarter report.

Baidu said it earned 1.07 billion yuan ($164.3 million), up from 480.5 million yuan in the year-ago period. That result was in line with the average 1.04 billion yuan forecast from analysts polled by Dow Jones Newswires.

Earnings per American depositary share were 3.06 yuan (47 U.S. cents) in the first quarter, up from 1.38 yuan a year earlier, compared to the consensus of 2.97 yuan per ADS.

Revenue grew to 2.44 billion yuan from 1.29 billion yuan, again in line with estimates of 2.45 billion yuan.

Baidu projected revenue in the second quarter of 3.23 billion yuan to 3.3 billion, above the 3.07 billion yuan average forecast.

Morgan Stanley analyst Richard Ji and his team maintained their equal weight rating and $150 price target on the stock, noting that they liked the increase in paying customers, growing second quarter sales and Baidu’s new initiatives. However, they were concerned with accelerating bandwidth costs.  “While Baidu, as a dominant paid search leader in China, is benefiting from the robust advertising demand from e-commerce players, we believe this has largely been priced in.”

Think Equity analyst Aaron Kessler maintained a Buy rating and $175 price target on the stock, touting the margin expansion, strong business momentum and above-consensus second quarter guidance. However, consumer adds were below his estimates.

Stifel Nicolaus analyst George Askew raised his price target to $172 from $144 on the earnings, noting that active online marketing customers (+24.0%) and revenue per customer (+51.8%) drove growth.

China International Capital analyst Jin Yi maintained a Buy rating and raised Baidu.com’s price target to $160 from $142. “We expect Baidu to maintain its leading position in PC search, gain momentum in mobile search, and capitalize on China’s e-commerce and online video growth. Box computing may further strengthen Baidu’s leading position as an integrated online platform.We recognize valuation bubbles are emerging for China’s internet companies both in the primary and secondary market. On one hand, Baidu, as the traffic center, is well positioned to absorb money swarming into the industry, and on the other hand its valuation is not very stretched, given the strong growth visibility for the next several years. Baidu remains one of our top picks.”

Article courtesy of Tech Trader Daily

$$$ JPMorgan To Double Headcount In Brazil [Reuters]

$$$ “Michigan is giving hundreds of financial professionals and public employees a crash course in advising troubled municipalities, building an army of emergency managers that may become a model for other U.S. states.” [Bloomberg]

$$$ Jitters Put Focus Back On European Debt [WSJ]

$$$ Where did your tax dollars go? [GB]

$$$ Morgan Stanley fund fails to repay debt on Tokyo property [Reuters]

$$$ ProPublica wins Pulitzer for The Wall Street Money Machine [Pulitzer]

$$$ Texas University Takes Cue From Kyle Bass to Hold $1 Billion in Gold Bars [Bloomberg]

$$$ Winklevoss Twins Ask for New Hearing in Facebook Case [Bits]

Article courtesy of Dealbreaker

Morgan Stanley’s european software analyst Adam Wood this morning raised his rating on shares of SAP AG (SAP) to Overweight from Equal Weight, with a €54 price target on SAP’s ordinary shares, arguing that the company’s “core” business is primed to “accelerate,” given that SAP is “in the sweetspot of enterprise IT spending.”

Morgan Stanley’s survey of U.S. chief information officers, as well as recent results from Oracle (ORCL) and Accenture (ACN), suggest enterprise IT spending is showing continued “momentum,” writes Wood. That fact should help SAP, combined with the fact that the company has made some important changes: “SAP has appointed new co-CEOs, revised its maintenance pricing structure and launched a series of new products that are reviving its reputation for innovation.”

Wood raised his 2011 revenue estimate to €3.83 billion from a prior €3.73 billion, and raised his 2012 estimate to €4.32 billion from a prior €4.08 billion.

Moreover, the 10% growth in combined license and software sales in 2012 that the Street is currently modeling can probably be achieved just on the basis of the core products, such as ERP, business intelligence and analytics, PLM, middleware, and database sales, writes Wood. Everything else — the HANA product, the Business By Design offering, and SAP’s mobility products — would be gravy, he argues.

SAP shares today fell 1.4% to €43.79 in European trading. American Depository Shares of SAP fell 57 cents, or 0.9%, to $63.48.

Article courtesy of Tech Trader Daily

Group-buying titan Groupon has taken further steps towards an initial public offering by selecting Goldman Sachs and Morgan Stanley to underwrite the offering, according to an article in the Wall Street Journal citing “people familiar with the matter.”

It’s been pretty clear for the past few months that an IPO is in Groupon’s sights, especially after the company walked away from a $6 billion acquisition offer from Google last year then raised a whopping $950 million in funding.

Bloomberg reported last month that Groupon was planning a $25 billion IPO this year. Now the Journal says that the IPO is expected to value the company between $15 and $20 billion. A number of consumer Internet companies, such as LinkedIn, have started filing for their IPOs this year. As reported, Groupon’s IPO would dwarf the offerings announced so far, though Facebook is likely to follow with an even larger IPO in the next couple of years.

I’ve emailed Groupon for comment and will update here if I hear from them.

Tags: IPOs

Companies: Goldman Sachs, Groupon, Morgan Stanley

Article courtesy of VentureBeat » deals

Yesterday afternoon, we noted that shares of ARM Holdings (ARMH) rebounded from a significant early drop to close up on the day.

Today, the Financial Times is reporting that the  microchip equipment maker topped the FTSE 100, rising 6.8%, after positive comments from analysts on the European component making sector.

ARM, which trades in London and through ADRs in the U.S., makes microchips used in Apple’s (AAPL) iPad and iPhone.

According to the FT, analysts at ING issued a note to clients saying the industry had had a “solid quarter” in the first three months of the year, and it expected companies “to meet earnings guidance”.

ARM was also mentioned in a note from Morgan Stanley, suggesting the company would benefit from Microsoft’s (MSFT) new Internet Explorer 10, which is designed to run on ARM chips.

Shares of ARM had fallen 4% in the prior London session after the U.S. chip maker Micrel (MCRL) cut its first-quarter forecast.

ADRs are up 1% at $29.01 in midday trading.

Article courtesy of Tech Trader Daily

Don’t be!

U.S. investment banks want staff to focus on business opportunities in Japan as the nation turns to rebuilding areas devastated by the earthquake and tsunami that triggered a nuclear accident, analysts said. Goldman Sachs has hosted three nuclear specialists and held sessions on emergency preparedness and family welfare, said Hiroko Matsumoto, a spokeswoman in Tokyo. Morgan Stanley asked two scientists to speak to staff and their families over the coming week and is importing water from Hong Kong, said Mika Watanabe, a Tokyo-based spokeswoman…Global banks “want to avoid lowering their presence and losing market share in Japan as the economy is still the third largest and it was picking up,” said Takehito Yamanaka, a Tokyo-based analyst at MF Global FXA Securities Ltd. “There will also be new demand for loans and fund raising from companies whose factories were damaged, as well as mergers and capital alliances.”

[Bloomberg]

Article courtesy of Dealbreaker

Nasdaq, ICE, Make NYSE Bid (WSJ)
Nasdaq OMX and ICE said Friday that they are proposing to buy NYSE Euronext for $42.50 in cash and stock per NYSE Euronext share, or about $11.3 billion, based on the respective Nasdaq OMX and ICE closing share prices on Thursday.

Berkshire’s Abel Advances in Buffett’s ‘Top 4’ After Sokol Exit (Bloomberg)
Buffett introduced Abel to Berkshire shareholders in the billionaire’s 2002 annual letter, calling the manager Sokol’s “key associate.” In subsequent letters, Abel’s name always followed Sokol’s as Buffett praised “Dave and Greg” for their work expanding the energy business. Sokol said in an interview last year that Abel began working with him at MidAmerican in the early 1990’s when the company was independent. Sokol, previously MidAmerican’s CEO, sold the company to Buffett for about $9 billion. Sokol said it was his idea to promote Abel three years ago. “I went to Warren and said, ‘Greg is doing a fantastic job,’” Sokol said on Aug. 16 at Bloomberg headquarters in New York. “Warren said ‘If that’s what you think is the right thing to do, then that’s fine.’ So I turned the CEO title over to Greg.”

U.S. Payrolls Grew 216,000 in March; Unemployment at 8.8% (Bloomberg)
Payrolls increased by 216,000 workers last month after a revised 194,000 gain the prior month, the Labor Department said today in Washington. Economists projected a March gain of 190,000, according to the median estimate in a Bloomberg News survey. The jobless rate dropped from 8.9 percent in February, the fourth straight decrease.

Warren Buffett’s Halo Tarnished, By Charlie Gasparino (TDB)
“I can tell you that this entire episode shows why investors and the media should stop portraying Warren Buffett as a saint, who never lies, cheats or equivocates and surrounds himself with similar heavenly characters. Instead, Buffett should be seem for what he is: A great investor and businessman motivated by greed and ambition and like his unheavenly deputy.”

Morgan Stanley Venture Struggles (WSJ)
A joint venture between Mitsubishi UFJ Financial Group Inc. and Morgan Stanley will likely report an extraordinary loss of about ¥80 billion ($956 million) for the just-ended fiscal year, due to unrealized losses from bond trading, people familiar with the matter said Friday. Mitsubishi UFJ Morgan Stanley Securities Co. was set up by MUFG and the U.S. investment bank in May last year by merging Morgan Stanley’s Japanese investment banking operations, including its merger and acquisition business, with Mitsubishi UFJ Securities.

Subprime Bonds Are Back (WSJ)
The prices on a representative slice of the subprime bond market have doubled from 30 cents on the dollar at the low point of the crisis to roughly 60 cents today.

TPG to Sell Stake to Kuwait, Singapore (WSJ)
TPG Holdings has reached a deal to sell nearly 5% of itself to sovereign-wealth funds operated by Kuwait and Singapore. The deal values the firm at about $11 billion and allows it to raise several hundred million dollars, according to people close to the matter.

Marc Faber: Still a Bear, and He Has His Reasons (CNBC)
“I know I will die, but I’m still living,” Faber says. “What do you want me to do about it? Should I kill myself in anticipation of certain death in 10 or 15 years time?” The same kind of logic applied to his run on Wall Street, which began in 1970 at the firm White Weld & Co. with a role summarizing economic research to send to overseas offices, in the pre-Internet days. He got to know future U.S. Federal Reserve Chairman Alan Greenspan, who gave a briefing to the firm every two weeks. “At the end I was the only person attending because all he did was summarize the Wall Street Journal of the previous day,” Faber says.

Roubini: Banks Risk Breaking Back Of Irish Government (CNBC)
“They cannot keep on socializing losses and eventually having sovereign risk becoming banking risk and banking risk becoming sovereign risk, that’s not the right approach.”

RBS Expects To Triple India Banking Assets (Bloomberg)
The U.K.’s biggest government-controlled bank, which manages $1 billion of assets for private banking clients in India, plans to increase its wealth management employees by 54 percent to 100 in two years, Gupta said. The bank will also add 20 more relationship managers in the country, taking the total to 45 in that period, he said.

Article courtesy of Dealbreaker

How about that Morgan Stanley mega report on Tesla Motors (TSLA), the one that has pushed the shares up and up by $4.56, or 19%, today to $28.27?

In raising the firm’s rating on Tesla from Equal Weight to Overweight this morning, you’ve got to hand it to Adam Jonas and his team for sheer chutzpah: the price target is, well, a bit above the current price, at $70.

Jonas writes that the “conditions are ripe for a shake-up of a complacent, century-old industry,” and that as electric cars come to comprise “a significant minority of global light vehicle sales medium-term and the majority long-term,” Tesla will be “America’s Fourth Automaker.”

What conditions, you ask?

High oil prices, and “government support accelerate the shift away from the internal combustion engine,” writes Jonas. That should lead to electric vehicles being 5.5% of global car shipments and 7% of U.S. shipments by 2020.

The key for Tesla is making electric vehicles a “mass market” phenomenon in the $30,000 price tag-range. And key to that is “fully utilizing” its facility in Fremont, California, where partner Toyota (TM) had produced half a million cars annually until it was shuttered a year ago, following which Toyota in May said it would purchase $50 million of Tesla stock and help the company build its “Model S” sedan at the Fremont plant.

“Tesla is a top-line story,” writes Jonas, “driven by their ability to capture a modest share of the growing electric vehicle market.” Out of that total 5.5% of global shipment that ma be electric in 2020, Jonas models the company selling 7.3% of that.

He sees the Model S shipping late next year, at a volume of about 2,000 units, and then the “Model X” by 2014, and the “Gen 3” in 2017. In 2020, Tesla should be getting 9% of its shipment volume from the Model S, 17% from the Model X, 62% from Gen 3, less than 1% from the “Roadster,” and 11% from “the supply of third-party power trains.”

By that time, unit volume will have surged from an estimated 2,400 units this year to 240,000 units, bringing in sales of $9.5 billion, Ebitda of $1.5 billion, and net income of $976 million.

But the in the meantime, the company’s biggest hurdle will be its burn rate: Tesla may reaching operating profitability by 2014, but it’s cash crunch will come in 2013, when “gross liquidity” falls to $146 million from what may be $362 million this year. Positive cash flow will be crucial then.

As for valuation, the discounted cash flow model used to derive the $70 target reflects a weighted average cost of capital of 12%, and 60% to 70% of the value is in the terminal value, Jonas notes.

But given losses over the next few years, Jonas adds the caveat, “On any valuation metric one would use to value a traditional auto company over a typical earnings horizon of 2 to 3 years, Tesla will appear anything but cheap.”

Article courtesy of Tech Trader Daily

James Gorman’s poker performance indicates he’s unlikely to run the firm into the ground.

Gorman, a man who has pared risk and made Morgan Stanley a more balanced institution, seems unlikely to make the sort of big bet that either propels the firm into a new golden age — or torpedoes it. He’s a more cautious and consistent player than that. Here’s how his friend Ken Buckfire, CEO of investment bank Miller Buckfire, describes Gorman’s performance in a summer poker game that’s been going on the better part of two decades: “He’s usually up a few bucks but never the big winner.” For Morgan Stanley in 2011, that may be just the kind of approach that’s called for.

It’s unclear if the Dollar Dominatrix knew about this when she took a shiv to MS’s earnings last week.

Can James Gorman Make Morgan Stanley Great Again? [Fortune]

Article courtesy of Dealbreaker