Analyst Picks and Pans: Abercrombie & Fitch, SanDisk, Melco

Abercrombie & Fitch Co. (ANF)

SunTrust Robinson Humphrey upgrades to buy from neutral

SunTrust Robinson Humphrey analyst Robin Murchison said on June 18 that Abercrombie & Fitch could post better earnings in 2011, propelled by lean inventory, deals on rent, better merchandise and lower prices, an analyst said, upgrading the stock.

Murchison raised her earnings-per-share estimate for its fiscal 2011 year to $2.15 from $1.43. She kept her profit estimate for fiscal 2010, which ends in January, at $1.16 per share.

Murchison said that Abercombie's shutdown of its Ruehl stores, to be completed by January 2010, will help profit margins in its 2011 fiscal year.

Murchison also said that markdowns will be smaller as the recession eases, even as regular prices are set lower at its Hollister stores, which sell a surf-wear-inspired line.

While management has acknolwdged mistakes in clothing offerings, especially in women's dresses and knits, she said she expects "an uptick in the fashion quotient." Abercrombie will also have an opportunity to renegotiate lower rents at 280 stores through 2011, and is "likely to play hardball," she said. Abercrombie is a mall-based store, and malls have been stricken by chain bankruptcies and are eager to prevent vacancies.

Murchison has a $34 price target on the stock.

SanDisk Corp. (SNDK)

Needham downgrades to underperform from hold

Needham analyst Y. Edwin Mok said on June 18 he downgraded the shares on early signs of weakness in the NAND sector that he believes will lead to lower prices. Mok noted that checks suggest NAND inventories increased substantially, while demand in both retail and OEM channels has slowed since May. Heading into the secomnd quarter, Mok is concerned production ramps will swing the NAND sector into oversupply.

The analyst believes Wall Street already expects SanDisk's second quarter results to come in ahead of expectations due to the company's conservative guidance, but its third-quarter outlook could disappoint if price declines accelerate. He narrowed his $1.00 2009 pro forma loss per share estimate to $0.91 to reflect a better second quarter.

Melco Crown Entertainment Ltd. (MPEL)

Deutsche Bank upgrades to buy from hold

Market confusion over Melco Crown Entertainment Ltd.'s new City of Dreams casino in Macau provides a buying opportunity, Deutsche Bank North American analyst Karen Tang said June 18. Tang said investors appear to be disappointed by City of Dreams' early market share.

But investors are not accounting for the volatility of VIP play, "which depends on luck," the analyst wrote in a client note.

The $2.1 billion casino complex -- which has three hotels, more than 500 gambling tables, Las Vegas-style shows, an upscale shopping mall and restaurants -- opened in Macau on June 1. Macau is the only place in China with legalized gambling.

After adjusting for VIP hold -- a measure of how much the big gamblers win -- Tang forecast Melco Crown, a developer and owner of Macau casino resorts, garners 16% to 18% market share -- which meets expectations. "Customer traffic at City of Dreams has been good. But VIP hold has been unfavorable," Tang said.

Wynn Resorts Ltd. had a similar experience in 2006 when it open its Wynn Macau resort, but was able to bounce back once VIP hold regulated, Tang explained. The analyst anticipates Melco Crown will likely follow the same path.

Tang increased Melco Crown's price target to $6.50 from $6 after boosting her 2010 earnings before interest, taxes, depreciation and amortization estimate by 5% to $421 million.

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