JP Morgan is out with a nice upgrade on Ashland (NYSE:ASH) taking their rating to Overweight from Neutral with a $17 tgt for Dec 2009.

Firm notes Ashland's recent monthly volume and margin data probably point to meaningful improvements in cash flow, free cash flow and earnings. The gross margin is widening considerably at Valvoline due to resilient product prices and sharply lower raw material costs stemming from base oil price decreases. The gross margin appears to be moving up in Water Treatment, and Aqualon sales are only decreasing at a low-double-digit rate. They believe the sum of these improvements point to decreased financial risk. Firm expects Ashland to generate free cash flow of close to $4.00 per share for F2009 (ends September). The valuation of Ashland remains distressed, in their view, selling at 3.6x F2009 EBITDA. Each EBITDA multiple point turn is worth about $10/share. Accordingly, they believe Ashland's shares offer large capital appreciation potential at reasonable levels of risk. JP Morgan's December 2009 price target is $17, or about an 11x multiple of EPS, consistent with other smaller capitalization chemical companies.

Ashland shares have been volatile. The shares decreased from $60 (pre-Hercules acquisition) to $6 to $10 currently. Despite the large price lift off from the bottom, they believe there is ample room for superior capital appreciation potential over a longer-term period given the company’s massive cost reduction efforts ($265 million in run-rate costs to be eliminated in F2009) as well as future cyclical strength.

Notablecalls: I like this one. Could see it run to $11 as soon as today.