Analyst Picks and Pans: Aetna, Netflix, GameStop

Aetna (AET)

Oppenheimer keeps outperform

Health insurer Aetna Inc. will need two years to bring its profit margins back to their former levels, Oppenheimer analyst Carl McDonald said Aug. 17 in a note to clients. McDonald said he spoke with Aetna Chief Financial Officer Joseph Zubretsky on Aug. 15. According to McDonald, Zubretsky said Aetna stands behind its profit guidance for the rest of 2009, but returning to its previous goals will take more time.

In July, Aetna said its profit fell 28% in the second quarter due to rising medical costs. McDonald said the company priced about 25% of its products for 2010 before discovering the trend toward higher costs.

Aetna has cut its profit forecast twice since June, and now expects a profit of $2.75 to $2.90 per share. Analysts expect earnings of $2.87 per share on average, according to Thomson Reuters.

McDonald said Zubretsky told him Aetna's enrollment won't grow next year, but the CFO believes his company can keep most of its current membership. McDonald said he expects Aetna's enrollment to decrease in 2010, however. The analyst also said Aetna had no new details on a potential sale of its pharmacy benefit management business. McDonald kept a price target of $32 per share on the Hartford, Conn., company.

Netflix (NFLX)

William Blair & Co. reiterates market perform

Warner Bros. is trying to wring more profit from DVD sales and that presents Netflix, the order-by-mail service, with a couple of bad scenarios, William Blair & Co. analyst Ralph Schackart warned Aug. 17. The Time Warner (TWX) movie studio said last week that it would delay shipments of new releases to $1-per-night DVD rental kiosks like Redbox, joining Universal Pictures and 20th Century Fox in trying to hold on to more profitable retail sales. Warner Bros. also wants revenue sharing agreements with rental providers like Netflix in return for providing titles on the same day they go on sale.

In a note to investors, Schackart raised concerns that Warner's announcement "could have a negative impact on Netflix." In one case, Schackart said, Warner could force less favorable terms, including "longer periods of limited access to new release titles" and higher prices. Netflix could also take the approach adopted by Redbox, a subsidiary of Bellevue, Wash.-based Coinstar Inc., and sue Warner, a move that would raise legal costs.

Redbox has already brought antitrust suits against Universal Pictures and 20th Century Fox, alleging both companies seek to raise DVD prices and limit customer choice.

GameStop (GME)

Wedbush Morgan says Q2 results will fall short

Shares of GameStop, the world's largest videogame retailer, slid 5% in premarket trading Aug. 17 after Wedbush Morgan analyst Michael Pachter predicted its second-quarter results would fall short and the company would have to cut its guidance. Pachter said in a note to investors that GameStop results on Aug. 20 are expected to be well below its own estimates due to the total decline in sales in the U.S. videogame sector.

In May, GameStop said it anticipated a profit of 28 cents to 33 cents per share for the period ended Aug. 1. Pachter said a more likely profit is 26 cents per share. Wall Street analyst polled by Thomson Reuters expect profit of 30 cents per share.

Last week, market researcher NPD Group reported a 29 percent industry-wide drop in sales of game hardware, software and accessories, an even steeper decline than analysts were expecting.

Pachter also thinks European sales were also bad. He predicts same-store sales, a key retail metric that measures sales in stores open at least a year, will fall 19%. The company expects a drop of 8% to 11%, compared with growth of 20% a year earlier.

Pachter said the Grapevine, Texas, company will also likely have to cuts its guidance for the year. GameStop expects same-store sales to range from flat to 2% growth and profit of $2.83 and $2.93 per share. Pachter forecasts GameStop will earn $2.85 per share during its fiscal year, while Wall Street's average earnings outlook calls for $2.81 per share.

However, Pachter said he expects an industry-wide rebound in game sales starting this month, and GameStop can look forward to a strong schedule of software and hardware releases later this year.

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