Stock Picks: McDonald's, Northrop Grumman, Disney

McDonald's (MCD)

Standard & Poor's Equity Research reiterates stong buy; raises estimates

S&P equity analyst Mark Basham said on Nov. 9 than McDonald's October U.S. comparable-store sales ("comps") were flat, in line with earlier management comments suggesting U.S. comps would be flat to down 1%. He noted that Europe and APMEA (Asia Pacific, Middle East & Africa) comps were both strong, up 6.4% and 4.7%, respectively; constant currency total sales were up 8.6% and 8.1%. Moreover, including effects of weaker dollar than a year ago, systemwide sales rose 16% in Europe and 21% in APMEA, Basham said.

The analyst said he had not previously incorporated a weak dollar benefit into his fourth quarter earnings per share (EPS) estimate, which management earlier said may be as much as 6 cents, but he raised this fourth-quarter and full-year 2009 estimates by 5 cents each to $1.05 and $4.05.

Northrop Grumman (NOC)

Jefferies & Co. upgrades to buy from hold; raises price target

Northrop Grumman said on Nov. 8 it was selling its advisory services unit TASC Inc. to private equity firm General Atlantic LLC and affiliates of Kohlberg Kravis Roberts & Co. for $1.65 billion in cash to comply with the government's "conflict of interest standards." Northrop said it will use the proceeds for a $1.1 billion increase in its stock buyback program.

The transaction shows Northrop Grumman's "understanding of and a capability to find value for shareholders in a changing market for defense-oriented suppliers," Jefferies & Co. analyst Howard Rubel wrote in a note to investors on Nov. 9. "Changes in procurement law almost required this sale."

He upgraded the company's shares, commending the company for returning the deal's gains to shareholders and what he said was a "reasonable" price for the TASC unit. Rubel also boosted his price target on the stock to $62 from $55.

Walt Disney Co. (DIS)

Deutsche Bank cuts estimate

In a note to investors Nov. 9, Deutsche Bank's Doug Mitchelson estimated Disney will take a $50 million write-down for its new version of "A Christmas Carol" based on the film's $31 million opening weekend and $200 million budget. He cut his earnings forecast for the company's fiscal fourth quarter to 2 cents per share from 40 cents per share. Disney reports earnings for the three months ended in September on Nov. 12.

Mitchelson said the good news is that the write-off will be taken at the end of the fiscal year, leaving a clean slate for 2010.

The weak release caps "a very disappointing year for Disney's film division," Mitchelson wrote. He cited a $50 million write-down for "G-Force" and the poorly timed release of "Confessions of a Shopaholic," a film about big spending that came out "in the midst of the recession." Mitchelson said he expects a stronger 2010 with the planned release of "Alice in Wonderland" and "Toy Story 3." Computer Sciences (CSC)

Kaufman Bros. reaffirms buy

Kaufman analyst Karl Keirstead updated his views on Computer Sciences in a Nov. 9 note ahead of the company's fiscal 2010 second quarter earnings call on Nov. 11. Keirstead noted that the company has guided to fiscal second-quarter revenues of approximately $3.9 billion and GAAP earnings per share (EPS) of $1.39, and full-year fiscal 2010 revenues of $16.0 billion to $16.5 billion (down 3% at the midpoint and up approximately 0%-1% in constant currency), new bookings of $17 billion-$18 billion, operating margin improvement of 25 to 50 basis points, GAAP EPS of $4.80-$5.00 and free cash flow equal to 90%-100% of earnings.

"In our view, most investors believe that the margin, EPS and cash flow guidance is achievable but many harbor doubts about the back-end loaded revenue and bookings guidance," said Keirstead. "[W]e believe that CSC's fiscal 2Q10 guidance looks achievable, the potential for EPS upside seems high, bookings have picked up recently and we understand that CSC met the early November roll-out milestone on the big NHS contract."

The analyst added that he believes the the shares, trading at 10 times his calendar 2010 GAAP EPS estimate of $5.20, "are undervalued enough that the risk/reward into the print is strong." He reaffirmed his price target of $62 per share.

Ameristar Casinos (ASCA)

Janney Capital Markets upgrades to buy from neutral; raises price target

Janney Capital Markets analyst Brian McGill on Nov. 9 upgraded Ameristar Casinos Inc. on lower capital spending and probable market share gain from its Black Hawk casino property in Colorado. McGill said in a note to investors that Ameristar does not have any future capital projects, so free cash flow is likely to be strong in 2010 and 2011. McGill expects extra cash will be used to pay down debt.

Meanwhile, Ameristar Casino's Black Hawk casino in Black Hawk, Colo., will probably take market share in the area, he said.

"We think Ameristar's focus on cash flow generation, rather than new markets or property expansions, makes it one of the safest names to own among the casino operators," McGill wrote. He raised his price target to $20 from $18.

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