Analyst Picks and Pans: Netflix, International Paper, Central Garden
Netflix Inc. (NFLX)Wedbush Morgan upgrades to buy from hold
Wedbush Morgan analyst Michael Pachter said on June 17 that Netflix's valuation is now more compelling as he believes the company can continue to deliver earnings growth through subscriber additions and margin expansion. Pachter said that as streaming gains in popularity and Netflix realizes higher margins, he expects the company to reinvest a portion in more streaming content. The analyst noted that Netflix management made clear its intentions to balance earnings per share (EPS) growth with further investment in streaming content and subscriber growth.
Pachter also thinks a recent increase in Blu-ray pricing could drive average revenue per user (ARPU) higher. He has a $48 price target on the shares.
International Paper Co. (IP)BMO downgrades to underperform from market perform
BMO analyst Stephen Atkinson told S&P MarketScope on June 17 his downgrade was based on valuation. Atkinson noted that IP is generating a lot of cash -- $1.2 billion related to "black liquor" tax credits (black liquor refers to a wood byproduct; the black liquor tax credit is a U.S. tax break meant to discourage use of fossil fuels), but the stock has nearly tripled off of its low.
Atkinson sees small losses for IP in 2009 and 2010, before it returns to profitability in 2011.
Central Garden & Pet Co. (CENT)ST Robinson Humphrey upgrades to buy from neutral
ST Robinson Humphrey analyst William Chappell said on June 17 he thinks Central Garden has finally turned the corner in terms of commodity, weather-related, and sector-specific challenges faced over the past year. Over the next 12-18 months, Chappell thinks Central Garden can at least return to its historical gross margin, continue to deleverage its balance sheet, and post double-digit EPS growth. He noted that cost structure improvements undertaken over the past year are bearing fruit, as evidenced by a drop in selling, general, and administrative (SG&A) expenses in the second quarter, which he thinks will continue to free up cash for debt repayment.
Chappell raised his $0.88 fiscal 2010 (ending September) EPS estimate to $0.98. He has a $14 price target.