Stock Picks: CA, Bed Bath & Beyond, Dr Pepper, Hot Topic

Wall Street analyst opinions on stocks making headlines in Thursday's market

CA Inc.: Raymond James analyst Michael Turits maintained a strong buy rating on shares of CA Inc. (CA) on Mar. 11.

CA Inc., the second-largest maker of software for mainframe computers, agreed on Mar. 10 to buy closely held Nimsoft Inc. for about $350 million to expand in cloud computing. The all-cash deal will probably cut net income by 10 cents a share in the year ending March 2011, Chief Financial Officer Nancy Cooper said on a conference call. Nimsoft's products help customers monitor so-called cloud systems, which access computers, applications and data through the Internet.

In a Mar. 11 note, Turits said the purchase continues a string of "aggressive" acquisitions this fiscal year aimed at extending CA's ability to monitor virtualized and service provider data center environments. "We have been impressed by the quality, aggressiveness and strategic discipline CA has shown with these purchases, which we believe should be effective in accelerating sustainable top-line growth," said Turits. "However, they do extract a price near term". The analyst estimates that CA spent as much as $700 million on acquisitions in fiscal 2010 (ending March) vs. its target range of $300-$500 million.

He said Nimsoft had $54 million in calendar 2009 bookings, up 32% from the previous year, and $32 million in revenues, up 18%, and was cash flow positive every quarter last year.

Turits said the Nimsoft deal, which is expected to close this quarter, will be dilutive to CA's fiscal 2011 earnings per share (EPS) by 3 cents, The deal is expected to be neutral to CA's earnings in fiscal 2012, he said. His EPS estimates are $1.68 for fiscal 2010 and $1.84 for fiscal 2011.

Bed Bath & Beyond Inc.: FBR Capital Markets analyst Stephen Chick lowered his rating on shares of Bed Bath & Beyond Inc. (BBBY) to underperform from market perform on Mar. 11.

In a note, Chick said the largest U.S. home-furnishings retailer is expected to "cycle" market-share benefits from the liquidation of former competitor Linens 'N Things, which had fully liquidated from the home furnishings market through December 2008. Chick said he thinks removal of Linens 'N Things from the market likely helped the company's same-store sales in 2009 by around 400 basis points. He said that estimated sales and EPS for the fiscal fourth quarter "should be good for BBBY ... yet we expect that recent trends represent the best it gets".

"Given that we have heard other companies have to increase expenses for things such as bonuses and labor, this leaves us concerned" about selling, general and administrative (SG&A) expenses heading into 2010 for Bed Bath & Beyond, the analyst wrote.

Chick said his upwardly revised fourth-quarter EPS estimate of 76 cents is ahead of the Wall Street consensus estimate of 72 cents; his 2010 EPS estimate of $2.50 is above the Street consensus estimate of $2.47.

The analyst lowered his price target for the shares to $38.00, from $38.50.

Dr Pepper Snapple Group Inc.: UBS Securities analyst Kaumil Gajrawala raised a rating on shares of Dr Pepper Snapple Group Inc. (DPS) to buy from neutral on Mar. 11.

Gajrawala said in a note that despite the recenbt advance in shares of the third-largest U.S. soda maker, "we believe the market is not fully valuing strong fundamentals and a rapid current and pending share repurchase".

In December, PepsiCo agreed to continue bottling some Dr Pepper Snapple soda brands, including Dr Pepper, Crush and Schweppes as part of an acquisition of two bottling companies. Under the agreement, which lasts for 20 years and can be renewed in 20-year increments, PepsiCo paid Plano, Texas-based Dr Pepper Snapple $900 million to license and distribute those brands. Gajrawala noted that Dr Pepper had received $900 million pre-tax from PepsiCo (PEP) and used $405 million of the proceeds to pay down debt. Gajrawala expects the company will receive an additional $800 million to $1.1 billion in licensing payments following the closure of Coca-Cola Co.'s (KO) acquisition of Coca-Cola Enterprises (CCE), "all of which will also likely be returned to shareholders".

The analyst said he believes Dr Pepper can continue to grow sales volumes through "a combination of expanding distribution, increasing coolers and Hispanic migration beyond core markets".

The analyst said he has a new 2010 EPS estimate of $2.33 for Dr Pepper. He raised his price target to $42 from $31.

Hot Topic Inc.: Roth Capital analyst Elizabeth Pierce kept a hold rating on shares of Hot Topic Inc. (HOTT) on Mar. 11.

Pierce said in a Mar. 11 note that the teen clothing and music retailer posted fourth-quarter EPS of 18 cents on Mar. 10, in line with her estimate and the consensus view of Wall Street analysts. She said Hot Topic's results were largely driven by difficult comparisons from the "hot-selling" Twilight and colored denim offerings from a year earlier, ongoing migration to downloading music vs. buying CDs, and lower-than-expected results from the Twilight sequel, New Moon.

The analyst noted that comparisons remain "tough" given that Hot Topic is not selling the New Moon DVD and that management initiatives "to 'level out' the peaks and valleys of the business won't happen overnight".

She cut her fiscal 2011 (ending January) EPS estimate to 22 cents from 35 cents, and her fiscal 2012 forecast to 35 cents from 43 cents. Pierce kept a $5.50 price target on the shares.

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