Stock Picks: GameStop, Hewlett-Packard, Hormel

Wall Street analysts offer buy, sell, or hold opinions on stocks in the news on Aug. 23

GameStop Corp.: Morgan Joseph reiterated a buy rating on shares of GameStop Corp. (GME) on Aug. 23. A price target on the shares was lowered to $27 from $28.

On Aug. 19, GameStop, the world's largest video-game retailer, reported that net income rose 4.3 percent to $40.3 million, or 26 cents a share, for the second quarter ended July 31, missing analysts' projections of 27 cents, the average of 17 estimates. Sales advanced 3.5 percent to $1.8 billion, shy of the $1.82 billion estimated by analysts. The company reported earnings of 32 cents excluding some items in last year's fiscal third quarter.

Profit for the third quarter will be 35 cents to 38 cents a share, the company said. That compares with a previous prediction of 38 cents to 41 cents and analysts' projections of 39 cents, the average of eight estimates compiled by Bloomberg.

The forecast change reflects costs associated with the national introduction of a customer-loyalty program and an in-store download service, along with acquisition expenses and spending on e-commerce programs, GameStop said. Last month, GameStop purchased Kongregate Inc., an online social-gaming website, for an undisclosed sum.

Excluding new stores, revenue will increase 3 percent to 6 percent for the quarter and as much as 2 percent for the year, the company said.

In a note, equity analyst Jeffrey Thomison said that GameStop's second-quarter results were "a mixed bag, but overall we were satisfied." He said that earnings slightly exceeded his expectation and met management's earlier guidance. "We are mindful of recent weak industry sales and difficult economic conditions. … [N]onetheless, the company outperformed the industry with strong sales of new titles and a 14 percent increase in EPS [earnings per share]," he said.

Thomison noted that sales of used products, GameStop's highest-margin business, rose 1 percent.

"The company's digital strategy is starting to get untracked," Thomison said, citing a successful trial of in-store selling of downloadable content. He said the service is being rolled out to GameStop stores nationwide in the current quarter.

Thomison said GameStop's acquisition of Kongregate "could ultimately prove beneficial to both businesses."

The analyst expects EPS of $2.60 for the current fiscal year ending in January 2011. "For FY11, we believe a combination of pent-up demand, new hardware peripheral devices, better console values, and GME's customer-loyalty program can lead to EPS growth of 8 percent to 9 percent to $2.82," he said.

Hewlett-Packard Co.: Standard & Poor's equity analyst Thomas Smith maintained a buy rating on shares of Hewlett-Packard Co. (HPQ) on Aug. 23.

On Aug. 23, Hewlett-Packard, the world's largest personal-computer maker, offered to buy 3Par Inc. for about $1.6 billion, topping Dell Inc.'s (DELL) bid for the maker of equipment and software products for data centers.

The bid of $24 a share in cash is 33 percent higher than Dell's offer, HP said in a statement. Dell offered $18 a share in cash, or about $1.15 billion, for 3Par on Aug. 16.

HP and Dell are competing for a smaller rival to challenge International Business Machines Corp. (IBM) in the market for more complex computer systems and technology services that yield higher profits than desktop and laptop PCs. 3Par, based in Fremont, Calif., makes hardware and software for reducing information-storage requirements.

"We believe that this episode in competitive bidding for key elements needed to offer a comprehensive data-center product line makes HPQ's size advantages over DELL more apparent," Smith said in a posting on the S&P MarketScope service.

Hormel Foods Corp.: Soleil Securities maintained a hold rating and $41 price target on shares of Hormel Foods Corp. (HRL) on Aug. 23.

On Aug. 20, Hormel, the maker of Spam lunchmeat, reported that third-quarter net income rose 11 percent to $85.4 million, or 63 cents a share, from $77.2 million, or 57 cents. Sales during the quarter ended July 25 rose 9.9 percent.

"We expect higher hog cost to continue in the fourth quarter, negatively impacting margins in our value-added refrigerated foods businesses and in our pork-based grocery products items," Chief Executive Officer Jeffrey M. Ettinger said on an earnings conference call with analysts.

In a note, equity analyst Eric Larson said improved hog cutout margins—the difference between the price paid for a live hog and prices received for cuts of meat—and "substantial" improvement at the company's Jennie-O Turkey and Specialty Foods units drove the majority of higher earnings.

Larson said Hormel management raised its fiscal 2010 EPS guidance from a range of $2.75-2.85 to $2.85-2.91; he increased his EPS estimates for fiscal 2010 to $2.88 from $2.85, and for fiscal 2011 to $3.10 from $3.03.

The analyst said Hormel shares trade at a premium valuation to both the packaged food group and the Standard & Poor's 500-stock index, and that he believes the stock is "fairly valued."

Before it's here, it's on the Bloomberg Terminal. LEARN MORE