Thursday's Calls Of Note: Wall Street Research On Airlines, Steel, Semis & More

The following represents a hand-picked selection of notable research curated by an analyst known in some circles as "The Sith Overlord Of The Street."

Longbow: ‘Great Execution' Supports Owning Western Digital

Joe Wittine of Longbow Research maintained a Buy rating on shares of Western Digital Corp WDC with a $100 price target as the company defended its profit margins "very well" amid an "awful" quarter for the HDD TAM which came in at 111 million units, missing the 125 million units originally expected.

The analyst concluded that Western Digital's enterprise mix is "gaining steam" and the "worst is behind" for PCs for now. In addition, the stock is "inexpensive" at 11x his fiscal 2017 forecast, or 9-10x if assuming a $1.50 plus of MOFCON synergies, which is expected to ramp over the next two to four quarters post a decision.

Susquehanna: ‘Encouraged' By Western Digital's Conference Call

Mehdi Hosseini of Susquehanna Financial Group commented in a note that he was "encouraged" from Western Digital's post-earnings conference call commentary.

The analyst singled out: 1) MOFCOM commentary was "more constructive" than in in previous quarters, 2) increased emphasis on Exabye growth, 3) impressive June quarter cost of goods sold and operating expenditure controls, and 4) Western Digital remains "well-positioned" in Enterprise HDD and SSD.

Shares remain Positive rated with a price target lowered to $105 from a previous $110 to account for a "weaker start" to fiscal 2016.

Longbow: Meritor Will Still Far Short OF Expectations

Neil Frohnapple of Longbow Research commented on Meritor Inc MTOR's reaffirmed fiscal 2015 revenue guidance in a research note.

Frohnapple noted that the company's revenue guidance range of $3.50 billion to $3.55 billion remains unchanged, but the company increased its EBITDA margin outlook to approximately 9.3 percent of sales from a prior estimate of 9.0 to 9.2 percent.

However, Frohnapple pointed to continued weakness in China and South America which is a "negative read-through" for companies exposed to these regions. In addition, the analyst speculated Meritor will "fall short" of its 10.0 percent EBITDA margin target due to slower than required growth from its end market.

Shares remain Neutral rated with no assigned price target.

Morgan Stanley: Don't Fight The Cycle In PACCAR

Nicole DeBlase of Morgan Stanley commented in a note that PACCAR Inc PCAR lacks positive EPS momentum which results in a bearish view of the company and the overall sector.

DeBlase is now forecasting a 10 percent decline in NAFTA Class 8 truck unit sales in both 2016 and 2017 as replacement demand will slow and fleet growth will remain "muted" following five years of "robust" replacement demand.

DeBlase concluded that based on forward looking estimates, "there remains no upside" to her 2015 $4.56 earnings per share estimate. In addition, the analyst cut her 2016 earnings per share estimate by 9 percent to $4.41 while 2017 estimates were slashed by 16 percent to $4.18, implying 2015 represents the "cycle peak."

Shares were downgraded to Equal-weight from Overweight with a price target lowered to $61 from a previous $69.

Morgan Stanley: Capital One Shares ‘Look Oversold'

Betsy Graseck of Morgan Stanley commented in a note that $8 of the approximate $12 decline in shares of Capital One Financial Corp. COF's shares after its earnings miss was attributed to market expectations over the expensive ratio.

However, Graseck suggested that Capital One's management team has "the tools" to deliver positive operating leverage in 2016. Specifically, higher rates should reduce the company's expense ratio by 50 basis points while another 40 basis point reduction is possible from the call center consolidation.

Shares were upgraded to Overweight from Equal-weight with an unchanged $90 price target.

Bernstein: Kraft-Heinz Could See Upside From Potential Acquisitions

Alexia Howard of Bernstein commented in a note that further upside to shares of Kraft Heinz Co KHC could come from future acquisitions in the next two to four years as the controlling shareholders have an "excellent" track record of increasing shareholder value.

Howard emphasized that further deal making activity is "more likely than not" as the company can boost its returns as a result of further acquisitions. The analyst suggested one possible multi-stage scenario is for the company to first acquire General Mills, Inc. GIS, then Mondelez International Inc MDLZ, followed by an acquisition in the food/snack industry. This scenario could result in around 20 percent annualized capital gains for shareholders.

Shares were upgraded to Outperform from Market Perform with a price target raised to $94 from a previous $73.50.

JPMorgan: Airline Wrap-up

Jamie Baker of JPMorgan commented in a note that shares of Southwest Airlines Co LUV are looking "cheap" as its valuation dipped below of JetBlue Airways Corporation JBLU which is "uncommon." The analyst noted that "this is the stuff opportunities are made of."

Baker also commented on Delta Air Lines, Inc. DAL's suggested path back to flattish RASM in the fourth quarter. The analyst pointed out that this would require Q4 RASM being above its third-quarter lever – a scenario that only occurred once in the last decade. As such, it is "hard' to reconcile how the company will achieve its goal.

Finally, Baker suggested that American Airlines Group Inc AAL pre-tax margins are "impressive," but their premium to the industry group "raises questions" regarding merger synergies. The analyst stated that he fails to see any concrete proof of merger synergies which is "disappointing."

Shares of Southwest were upgraded to Overweight from Neutral with a price target raised to $50 from a previous $42.50.

Shares of Delta remain Overweight rated with a price target raised to $63 from a previous $53.50.

Shares of American Airlines remain Overweight rated with a price target lowered to $72 from a previous $72.50.

JPMorgan: Steel Fundamentals Have Bottomed: Buy AK Steel, U.S Steel

Michael Gambardella of JPMorgan commented in a note that fundamentals for domestic integrated steel makers have recently bottomed. The analyst continued that falling imports and "stable" demand should push steel prices higher through the year.

The analyst pointed out that AK Steel Holding Corporation AKS reported a better-than-expected second-quarter print despite "extremely weak" steel prices from high levels of imports.

Looking forward, lower imports should push steel prices higher which will boost AK Steel's stock price in the near term.

Gambardella also commented that HRC prices are expected to increase to the low $500/ton range by the end of the year as the import situation "sees some improvement" and demand "remains stable." This will benefit United States Steel Corporation X.

The analyst continued that U.S. Steel's outlook remains favorable, especially when coupled with management's comments that it will benefit from $375 million in incremental cost improvements in the bottom half of the year and reach the low end of its adjusted EBITDA guidance of $700 million to $900 million.

Shares of AK Steel were upgraded to Overweight from Neutral with an established $5 price target.

Shares of U.S. Steel were upgraded to Overweight from Neutral with a price target raised to $28 from a previous $26.

JPMorgan: Garmin Showing ‘Fitness Fatigue'

Paul Coster of JPMorgan commented in a note that Garmin Ltd. GRMN's Fitness segment is showing signs of "fatigue" following the release of its second quarter results.

Coster pointed out that Garmin's Fitness segment has seen growth and margins decelerating as the segment laps difficult comps. The analyst suggested that the company is facing stiff competition, especially from market leader Fitbit Inc FIT.

Outside of the Fitness category, PND (Personal Navigation Devices) showed a double-digit decline, Aviation was worse than expected. On the other hand Marine "surprised" to the upside, but the segment faces difficult comps in the bottom half of the year.

Bottom line, Coster sees no catalysts that could spur a return to revenue growth in the next two years.

Shares were downgraded to Underweight from Neutral with a price target lowered to $40 from a previous $42.