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Picks of the Week: Visa, Apollo Group, Baidu, Verizon

Wall Street analysts give their buy, sell, or hold views on various stocks in the news this week

Highlights of analyst stock opinions issued the week of Oct. 26-30:

Oct. 30

McAfee (MFE)

R.W. Baird upgrades to outperform from neutral; raises price target

R.W. Baird analyst Steven Ashley said Oct. 30 that McAfee reported in-line third-quarter revenue of $485 million and earnings per share (EPS) of 62 cents compared to consensus estimates of $486 million and 61 cents and his forecast of $489 million and 62 cents. Ashley expects investors to come away from the third quarter with mixed emotions, which he views as an opportunity. He noted concerns might include: 1) whether PC OEM deals really provide adequate return on investment; 2) challenges in closing very large deals; and 3) Symantec's (SYMC) improved execution in its consumer business.

On the positive side, Ashley notes that: 1) The company's OEM deal with Dell (DELL) was extended two years; and 2) Symantec's fourth quarter revenue guidance was above the Wall Street consensus. He raised his $45 price target to $50.

Estee Lauder (EL)

Wedbush Morgan reiterates outperform; raises estimates, price target

Wedbush analyst Rommel Dionisio said on Oct. 30 that Estee Lauder's $1.852 billion first-quarter revenue was relatively in line with his estimates, but the company's adjusted EPS of 85 cents far exceeded his recently raised 40-cent view, and management's revised 23 cents-30 cents estimate. Dionisio tied the company's outperformance to much lower-than-expected SG&A spending in the face of a challenging global economy. He noted that the Asia Pacific and travel retail operations were particular bright spots in the first quarter.

The analyst raised his $1.80 fiscal 2010 (ending June) EPS estimate to $2.07, and hi $2.03 fiscal 2011 forecast to $2.07, after Estee Lauder lifted its fiscal 2010 view to $1.95-$2.10 from $1.55-$1.70. He raised his $48 price target to $50.

Oct. 29

Exxon Mobil (XOM)

Standard & Poor's Equity Research reiterates strong buy; raises estimates, price target

S&P equity analyst Tina Vital said on Oct. 29 that Exxon Mobil posted third-quarter operating earnings per share (EPS) of 98 cents, vs. EPS of $2.58 one year earlier, reflecting lower commodity prices and narrowed margins. Vital said the results were 2 cents below her estimate, reflecting weak U.S. refining results. Oil & gas production rose 2.7% to 3.69 million barrels of oil equivalent (boe) per day on major project start-ups, but was below Vital's estimate; she expects flat growth in 2009 with a ramp-up in 2010.

Vital raised her 2009 operating EPS estimate by 8 cents to $3.88, her 2010 forecast by 8 cents to $5.96, and her 2011 view by 5 cents to $7.50. She increased her 12-month price target by $4 to $88.

Oct. 28

Visa (V)

Standard & Poor's Equity Research maintains hold; raises estimate, price target

S&P equity analyst Stuart Plesser said on Oct. 28 that Visa posted fiscal fourth-quarter operating earnings per share (EPS) of 74 cents, vs. 58 cents EPS one year earlier, matching his estimate. Notably, said Plesser, Visa's global payment volume declined only 2% vs. a 5% decline in the previous quarter, which points to a stabilization of spending habits by the consumer. Debit payments rose year over year, noted the analyst, as consumers continue to favor debit transactions -- a positive for Visa as it has a preponderance of debit cards.

Based on the higher spending volume, Plesser raised his fiscal 2010 (ending September) EPS estimate by 17 cents to $3.55. He also hiked his price target by $12 to $88.

AK Steel Holding (AKS)

U.S. Steel (X)

KeyBanc Capital Markets downgrades both to hold from buy

Steel Dynamics (STLD)

Reliance Steel & Aluminum (RS)

Olympic Steel (ZEUS)

KeyBanc Capital Markets reiterates buy on each

The economy is recovering too slowly to help U.S. steel manufacturers boost profitability soon, KeyBanc Capital Markets analyst Mark L. Parr said on Oct. 28. Parr said ferrous scrap prices could continue to decline over the next couple of months. He cited a recent $30 per ton decline in export scrap pricing.

"Domestic mills and export buyers remain on the sidelines, likely dampening the ability to substantially maintain or raise hot-rolled pricing realizations over the near term despite low supply chain inventories," Parr said in a client note.

Parr reduced his ratings for AK Steel and U.S. Steel, saying fourth-quarter outlooks from the two steel makers Tuesday were "somewhat disappointing."

"The outlooks clearly imply profit is very levered to pricing," Parr said. "With a more subdued pricing recovery unfolding, profit recovery will likely also be more gradual in nature."

U.S. Steel said Tuesday it expects better results in the fourth quarter, but it also said it plans to idle two blast furnaces. AK Steel said it expects shipments to rise in the final three months of the year. But its average selling price is expected to fall because it forecasts a higher percentage of carbon steel sales relative to more expensive stainless and electrical steels.

Parr said steel service center and restocking also may be hampered by a continuing lack of credit. "In our view, these issues put a premium on companies that are nimble, low-cost producers and those in place to support sporadic levels of demand as the recovery unfolds," he said.

He reiterated buy ratings on Steel Dynamics, Reliance Steel & Aluminum, and Olympic Steel Inc.

Apollo Group (APOL)

Wedbush Morgan reiterates underperform; cuts price target

Shares of Apollo Group Inc., owner of the University of Phoenix, the biggest for-profit higher education provider in the U.S., fell on Oct. 28 after the company said the Securities and Exchange Commission had launched an "informal inquiry" into its revenue accounting practices. Shares tumbled $11, or 15.1%, to $61.97 before the start of regular trading.

This is the second time this year the SEC has looked into how Apollo accounts for sales, most of which comes from students' tuition. Federal student loans from the government make up nearly 90% of Apollo's tuition income. In February, the corporate finance division of the SEC said it was looking into Apollo's revenue recognition practices. This new probe comes from the SEC's enforcement unit.

"Some investors have opted to scrutinize the company's practices on student refunds and bad debt expense, the implication being that this could be the beginning of an industry wide review of practices," wrote Wedbush Morgan analyst Ariel Sokol in a note to investors Oct. 28. Sokol cut his price target on Apollo shares to $65 from $80. "We remind investors that its plausible that the issue could equally relate to other parts of the business."

Oct. 27

Baidu (BIDU)

Goldman Sachs cuts estimates and price target, keeps buy opinion; Oppenheimer & Co. keeps perform opinion

Shares of Baidu Inc. headed sharply lower Tuesday after China's top search engine warned its revenue may decline temporarily as it switches to a new advertising system.

Late Monday, the Beijing company posted a 42% jump in third-quarter profit, beating analysts' expectations, but said it expects a "temporary negative impact" on fourth-quarter revenue as it completes the transition to its new online advertising system, called Phoenix Nest.

Baidu's American Depositary shares fell $53.83, or 12%, to $379.14 in morning trading Tuesday as investors digested the news. The stock has traded in the 52-week range of $100.50 and $439.90.

Goldman Sachs analyst James Mitchell said in a note that Baidu guided for a sequential decline in fourth quarter revenue due to its decision to end its legacy Baidu Classic bidding system and rely only on Baidu Professional effective Dec. 1.

Given a lower fourth quarter revenue base, Mitchell cut $6.83 2009 EPS estimate to $6.54, $11.46 for 2010 to $10.34 and $16.05 for 2011 to $15.45. He also lowered his $455 six-month target for the stock to $435.

Mitchell said he is disappointed that management did not communicate the risks around a faster transition to investors sooner. Still, he views its decision to discontinue the old bidding system by Dec. 1 as strategically justifiable.

Some analysts believe the guidance is a temporary blip in Baidu's path to making more money through advertising. "We believe the transition will result in short-term pain but long-term gain in terms of monetization as (Phoenix Nest) increases the matching of more relevant paid links resulting in higher click-through rates," wrote Paul Keung, an analyst with Oppenheimer & Co., in a note. He kept a perform rating on Baidu.

Scientific Games (SGMS)

William Blair downgrades to market perform from outperform

Scientific Games shares were down 20% to 14.08 during afternoon trading Tuesday after reporting third quarter results. The company also announced that CEO Joseph Wright will retire at the end of the year.

William Blair analyst Ralph Schackart said Scientific Games posted third quarter reported EPS of $0.16, missing the Street's view by $0.02. Given increasing clarity in Italy and longer-than-expected time to develop the market in China, domestic re-bids a potential headwind to growth over the next two years, and surprising management changes, he downgraded the stock to market perform from outperform.

In addition, Schackart lowered 2010 EPS estimate to $0.85 from $0.92.

Oct. 26

Netflix (NFLX)

Janney Montgomery Scott reiterates sell

DVD rental company Netflix Inc. is betting that its plan to stream content to users' TVs through Sony's (SNE) PlayStation 3 gaming console may help it win millions of new customers, but the deal's benefits are uncertain as competitive threats from other digital content providers remain, said Janney Montgomery Scott analyst analyst Tony Wible on Oct. 26.

Netflix shares rose 12% last week, which "largely discounts the new deal," said Wible in a note to investors. He added that uncertainty around timing, the potential for increased costs and overlap with subscribers who already stream Netflix content through their Xbox 360 gaming devices make judging the deal's benefits tough.

"We ultimately see (Netflix) being hurt," Wible wrote, due to competitive pressures from Redbox, which rents DVDs for $1 per night from in-store kiosks, and the increasing amounts of video available from Internet downloads and cable TV providers.

Verizon Communications (VZ)

Standard & Poor's Equity Research maintains buy; lowers estimate, price target

S&P equity analysty Todd Rosenbluth said on Oct. 26 that Verizon posted third quarter earnings per share (EPS) of 60 cents, vs. 59 cents EPS one year earlier, below his 65 cents estimate and before one-time items. Revenues and EBITDA matched his forecast, noted Rosnebluth, but EPS trailed his view on higher non-operating costs.

Verizon's wireless business remained strong, said the analyst, with 1.2 million customer adds and margin expansion, though voice revenue was under pressure.

"We see room for wireless growth in 2010, but think wireline will lag until [the] job market improves," said Rosenbluth.

The analyst narrowed his 2010 EPS estimate by 9 cents to $2.59 and his 12-month price target by $1 to $34. "But with cash flow growth, we see Verizon as attractive aided by its 6.5% dividend yield," he added.

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