Stock Picks: Scientific Games, Cabot Oil & Gas, Baidu

Scientific Games (SGMS) William Blair downgrades to market perform from outperform

Scientific Games shares were down 20% to 14.08 during afternoon trading Tuesday after reporting third quarter results. The company also announced that CEO Joseph Wright will retire at the end of the year.

William Blair analyst Ralph Schackart said Scientific Games posted third quarter reported EPS of $0.16, missing the Street's view by $0.02. Given increasing clarity in Italy and longer-than-expected time to develop the market in China, domestic re-bids a potential headwind to growth over the next two years, and surprising management changes, he downgraded the stock to market perform from outperform.

In addition, Schackart lowered 2010 EPS estimate to $0.85 from $0.92.

Cabot Oil & Gas (COG) JP Morgan upgrades to overweight from neutral

JP Morgan analyst Joseph Allman said Cabot Oil & Gas' recurring third quarter EPS of $0.38 beat the consensus forecast of $0.36.

Allman said he upgraded the stock as Cabot has shown strong well results in the Marcellus Shale well, and is developing the Pettet Lime oil play, which is small but offers upside from liquids production. He noted that Cabot is guiding for 2010 production growth of approximately 19% year-over-year, but he thinks the company's growth view looks conservative, especially for the back half of year. He believes 2010 production growth likely will be closer to 25%.

He raised his $47 price target on the stock to $51.50.

Baidu (BIDU) Goldman Sachs cuts estimates and price target, keeps buy opinion; Oppenheimer & Co. keeps perform opinion

Shares of Baidu Inc. headed sharply lower Tuesday after China's top search engine warned its revenue may decline temporarily as it switches to a new advertising system.

Late Monday, the Beijing company posted a 42% jump in third-quarter profit, beating analysts' expectations, but said it expects a "temporary negative impact" on fourth-quarter revenue as it completes the transition to its new online advertising system, called Phoenix Nest.

Baidu's American Depositary shares fell $53.83, or 12%, to $379.14 in morning trading Tuesday as investors digested the news. The stock has traded in the 52-week range of $100.50 and $439.90.

Goldman Sachs analyst James Mitchell said in a note that Baidu guided for a sequential decline in fourth quarter revenue due to its decision to end its legacy Baidu Classic bidding system and rely only on Baidu Professional effective Dec. 1.

Given a lower fourth quarter revenue base, Mitchell cut $6.83 2009 EPS estimate to $6.54, $11.46 for 2010 to $10.34 and $16.05 for 2011 to $15.45. He also lowered his $455 six-month target for the stock to $435.

Mitchell said he is disappointed that management did not communicate the risks around a faster transition to investors sooner. Still, he views its decision to discontinue the old bidding system by Dec. 1 as strategically justifiable.

Some analysts believe the guidance is a temporary blip in Baidu's path to making more money through advertising. "We believe the transition will result in short-term pain but long-term gain in terms of monetization as (Phoenix Nest) increases the matching of more relevant paid links resulting in higher click-through rates," wrote Paul Keung, an analyst with Oppenheimer & Co., in a note. He kept a perform rating on Baidu.

VF Corp. (VFC) UBS cuts estimates, keeps buy UBS analyst Michael Binetti says VF Corp.'s $1.94 third quarter EPS came in $0.01 below his and Wall Street's view on a 5% revenue drop (vs. UBS's -4.5% estimate).

Importantly, Binetti notes VFC guided to 2009 revenue decline of 4% (excluding foreign exchange, at the low end of previous ex-FX guidance), and did not raise the high end of its 2009 EPS guidance (now $4.85-$5.00, previously $4.70-$5.00).

He trimmed his $4.97 2009 EPS estimate to $4.96 on third quarter shortfall, but he still believes in the company's growth strategy. He maintained a buy opinion with a $83 price target on the stock.

Binetti said the lack of a significant guidance increase will likely lead to a lower open for VFC's stock.

RadioShack (RSH) KeyBanc Capital Markets upgrades to hold from underweight

KeyBanc Capital Markets analyst Bradley Thomas upgraded electronics retailer RadioShack Corp. on improving sales, particularly for wireless devices.

RadioShack's third-quarter earnings were better than he expected, wrote Thomas in a note Tuesday. On Monday, the company reported profit fell 24%, while sales edged down 3% to $990 million, beating analyst expectations.

RadioShack reported stronger sales for its Sprint Nextel postpaid wireless business, netbooks and prepaid wireless handsets and airtime. The addition of T-Mobile as a postpaid wireless carrier -- added Aug. 19 -- also contributed to revenue.

"The wireless category, which represents one-third of sales, appears well positioned for trends to continue into the fourth quarter," Thomas wrote. "Sprint appears to be gaining traction through improved plans and phones. Furthermore, the entire quarter will include T-Mobile wireless sales."

Still, he said the wireless category generates higher commissions, which will pressure expenses.

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