Picks of the Week: IBM, AmEx, Citi, Google, eBay

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

Notable Wall Street analyst opinions on stocks in the news for the week of Jan. 19-Jan. 22:

Jan. 19

Citigroup Inc. (C)

Deutsche Bank maintains buy

Citigroup Inc., the U.S. bank that is 27% owned by the Treasury Department, reported a $7.6 billion fourth-quarter loss (33 cents per share) on Jan. 19 from costs to exit the government’s bailout program.

Deutsche Bank analyst Matthew O'Connor said on Jan. 19 that while there were some disappointments in Citi's report, including a lower net interest margin, he believes there were several positives which show Citi "is making meaningful progress in its turnaround". "With the stock trading at a 20% discount to tangible book and capital/reserves the highest in the industry we continue to believe the risk/reward is favorable (despite the government ownership overhang)," he wrote.

O'Connor noted that Citi's credit costs declined 10% quarter-over-quarter (after declining 28% last quarter), vs. expectations of a slight increase; and that the bank's Tier 1 common ratio was slightly higher than expected at 9.6% (loan loss reserves were 6.1% of loans).

On the negative side, O'Connor said that Citi's net interest margin declined 30 basis points, quarter-over-quarter, after a large decline in the third quarter. Also, expenses rose slightly from the previous quarter despite lower revenue and the continued run-off of troubled assets from the Citi Holdings unit, the analyst said.

O'Connor has a price target of $5.50 on Citi shares.

Kraft Foods (KFT)

Standard & Poor's Equity Research upgrades to hold from sell; raises target price

Cadbury Plc's board agreed to an 11.9 billion-pound ($19.7 billion) takeover offer from Kraft Foods on Jan. 19.

S&P equity analyst Thomas Graves raised his opinion on shares of Kraft, the maker of Oreo cookies and Toblerone chocolates on Jan. 19, saying he expects its increased offer will be enough to acquire Cadbury; he looks for deal to close in the first quarter. "We do not expect [a] higher offer from Hershey (HSY) or anyone else," Graves wrote in a note.

The analyst sees Cadbury offering strategic value for Kraft, including opportunities in developing international markets. With less concern about how much Kraft would pay, plus a higher estimate on the cost-saving synergies the deal would generate, Graves sees reduced risk in Kraft shares. He raised his 12-month target price to $30, from $25, noting that Kraft's indicated dividend yield is 4.0%.

Jan. 20

IBM Corp. (IBM)

Cannacord Adams upgrades to buy from hold; raises estimate, target price

IBM Corp., the world's largest computer-services provider, reported a fourth-quarter profit of $4.81 billion, or $3.59 a share, after the close of trading Jan. 19. The company said full-year profit will exceed its earlier target, helped by the rebounding economy.

Canaccord Adams analyst Peter Misek raised his rating on IBM on Jan. 20. Miske said in a note that IBM's revenue of $27.2 billion was higher than his $26.7 billion forecast and the Wall Street consensus forecast of $26.9 billion. Misek said IBM's reported EPS of $3.59, when adjusted for a lower tax rate, would have been about $3.50, which would have been in line with his estimate of $3.51 and ahead of the Street consensus of $3.47.

Misek said that IBM management "continues to execute on its plan" and has announced that it now anticipates 2010 EPS to be at least $11. IBM reported signings in the quarter at $18.8 billion, ahead of Wall Street expectations. He also said IBM expects "strong first-quarter results out of its software division due to a strong pipeline entering 2010".

The analyst raised his 2010 EPS estimate by 42 cents to $11.03.

"In 2010, we anticipate IBM will benefit from the signing strength it experienced throughout 2009, which should result in annual growth generated within the services business," Misek wrote. He raised his target price to $150 from $130.

Bank of America Corp. (BAC)

Morgan Stanley maintains overweight

Bank of America Corp., the largest U.S. lender, posted a wider than expected fourth-quarter loss of $5.2 billion, or 60 cents a share, on Jan. 20, which included the costs of exiting the Troubled Asset Relief Program.

Morgan Stanley analyst Betsy Graseck said on Jan. 20 that BofA's revenues were lighter than expected -- similar to Citigroup 's (C) fourth-quarter report on Jan. 19 -- but its credit trends were improving. She noted that BofA's net charge-off ratio of 4.54% was 48 basis points below her forecast of 5.02%.

Graseck also pointed out that the company's reserve build was higher than expected at $1.7 billion, vs. her estimate of $1.3 billion. BofA's nonperforming loans of $33.5 billion were 9% better than her forecast.

Graseck said that BofA is her top pick among large-cap banks.

Jan. 21

eBay (EBAY)

Susquehanna Financial maintains positive

EBay Inc., the most-visited U.S. e-commerce site, reported fourth-quarter profit that topped analysts' estimates after the close of trading Jan. 20. Net income rose to $1.35 billion, or $1.02 a share, from $367.2 million, or 29 cents, a year ago. Excluding some items, profit was 44 cents a share.

Susquehanna Financial analyst Marianne Wolk said on Jan. 21 that eBay posted an "excellent" quarter. The analyst said in a note that the results demonstrated further evidence of a turnaround in eBay's core business, which the analyst noted gained share in select geographies for first time in years, as well as ongoing momentum at its PayPal electronic payments unit.

Wolk said that strong fourth-quarter results, combined with better-than-expected guidance for 2010, should fuel a rebound in the stock in early trading Jan. 21 (the shares had gained 8.2% near midsession). She said she remains optimistic that eBay is on track for stronger earnings per share growth and free cash flows.

The analyst noted that eBay's non-GAAP fourth-quarter EPS of 44 cents beat her 40 cents estimate. She raised her 2010 EPS estimate to $1.70 from $1.67, a bit above the company's $1.63-$1.68 guidance. She has a $31 price target on the shares.

Goldman Sachs (GS)

Standard & Poor's Equity Research maintains strong buy; lowers estimate

Goldman Sachs Group, the most profitable securities firm in Wall Street history, that beat analysts' estimates on Jan. 21. Net income of $4.95 billion, or $8.20 per share, for the three months ended Dec. 31 compared with a loss of $2.12 billion, or $4.97 per share, for the same period in 2008, when the fiscal year ended in November.

S&P equity analyst Matthew Albrecht said that Goldman's fourth-quarter EPS beats his $5.40 estimate. He said in a Jan. 21 note that investment banking revenues were much better than he anticipated, offsetting a lackluster quarter for trading; Goldman's bottom line was helped by a negative compensation accrual rate.

"Though regulatory uncertainties cloud the industry's outlook, we think GS is best positioned to benefit from a cyclical recovery in investment banking," the analyst wrote.

Albrecht lowered his 2010 EPS estimate by 55 cents to $20.28 on reduced trading expectations, but kept his $216 target price.

Jan. 22

Google Inc. (GOOG)

Stifel Nicolaus reiterates buy

Google Inc., owner of the world's most popular search engine, reported fourth-quarter sales that fell short of some analysts' estimates after the close of trading Jan. 21. Net income rose to $1.97 billion, or $6.13 a share, from $382.4 million, or $1.21, a year earlier when Google wrote down $1.09 billion of investments. Excluding revenue passed on to partner sites, sales totaled $4.95 billion.

Stifel Nicolaus analyst George I. Askew reiterated a buy rating on the shares on Jan. 22, noting that Google's 2009 fourth-quarter results were strong despite "the market's initial knee-jerk reaction". Askew said in a note that growth in clicks was in line with consensus estimates while cost-per-click "surprised on the upside" as advertiser demand pushed auction pricing, and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margins expanded 240 basis points year-over-year as cost cutting and high incremental margins support operating leverage.

"However, Google did not beat the top end of analyst revenue ex-TAC [revenue excluding amounts passed on to partner sites] estimates and other high expectations," which Askew said he believed was the cause for the decline in the shares in after-hours trading Jan. 21.

The analyst said Google "is much more than an improving economy story", as it is is innovating in huge markets including the online display advertising market, which represents about one-third of $54 billion global online advertising spending. Also, "Google is literally building a global mobile platform with scale that should eventually support the company's ambitious advertising monetization strategies," the analyst said, adding that the global mobile advertising market, currently at about $1.5 billion, is expected to top $10 billion "in perhaps three years".

Askew set first-quarter estimates of ex-TAC revenues of $4.875 billion; adjusted EBITDA of $3.0398 billion; and cash earnings per share of $6.43. His adjusted 2010 forecast calls for ex-TAC revenues of $20.610 billion; adjusted EBITDA of $12.923 billion; and cash EPS of $27.63. For 2011, he estimates ex-TAC revenues of $23.401 billion; adjusted EBITDA of $14.395 billion; and cash EPS of $31.31.

The analyst also maintained his $650 price target.

American Express Co. (AXP)

RBC Capital Markets reiterates underperform; raises price target

American Express Co., the biggest U.S. credit-card issuer by purchases, said after the close of trading Jan. 21 that fourth-quarter profit more than doubled amid a surge in customer spending and lower expenses for future defaults. Income from continuing operations climbed to $710 million, or 59 cents a share, from $306 million, or 26 cents, in the same period in 2008, New York-based AmEx said in a statement.

RBC Capital Markets analyst Jason Arnold reiterated an underperform rating on the stock on Jan. 22, saying that he views the shares as overvalued relative to his future return outlook.

The analyst noted that managed charge-offs fell to 7.3%, compared to 8.6% in the 2009 third quarter, while the loss provision declined "meaningfully" to $748 million, vs. $1.2 billion in the prior quarter, driven by a reserve release and better credit trends in both loans and charge receivables. "While the improvement is a welcome sign, we remain concerned that credit pressure will remain high while economic challenges persist," the analyst wrote in a note.

Arnold lowered his estimate for core earnings per share in 2010 to $2.19 from $2.31, largely due more a moderate credit performance outlook offset by exclusion of revenue from a litigation settlement with Visa and MasterCard. He raised his 2011 EPS estimate "modestly" to $2.34 from $2.19.

"While conditions may have stabilized, broader economic challenges will likely weigh for some time ahead for the consumer, and for American Express as well, in our view," Arnold wrote.

The analyst raised his price target on the shares to $31 from $28.

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