Stock Picks: Wal-Mart, Hewlett-Packard, Brocade

Wal-Mart (WMT)

Standard & Poor's Equity Research reiterates strong buy; raises estimate

S&P equity analyst Joseph Agnese said on Nov.12 that Wal-Mart's October-quarter EPS of 84 cents, vs. 77 cents EPS one year earlier, is 3 cents above our estimate. Agnese said Wal-Mart's results benefited from increased store productivity and improved inventory management, despite a 0.4% decline in comparable-store sales excluding fuel, below his 1.0% estimate. He expects the company to aggressively price offerings this holiday season in an effort to drive sales growth by utilizing benefits from cost-reduction initiatives.

Due to the slower than expected comparable-store sales growth, Agnese raised his our fiscal 2010 (ending January) EPS estimate only one cent to $3.61 and kept his 12-month price target of $62.

Hewlett-Packard (HPQ)

Kaufman Bros. maintains buy; raises estimates, price target

After the close of trading Nov. 11, HP announced its intent to acquire 3Com for $2.7 billion. In addition, it preannounced upside for both its October and January quarters. On Nov. 12, Kaufman analyst Shaw Wu said he was "somewhat surprised" that 3Com was the networking company HP chose to acquire. "Juniper (JNPR) is viewed as a prized asset and No. 2 to Cisco (CSCO) but its market capitalization at $13 billion and likely acquisition premium are likely a bit daunting, he said in a note to clients. He believes the 3Com deal is a relatively low-risk, "bolt-on" acquisition.

Wu also said HP's preannounced upside for both the October and January quarters is fairly consistent with his recent industry and supply chain checks and potential for better-than-seasonal trends. For the October quarter, he is now modeling $30.8 billion in revenue and $1.14 in earnings per share (EPS), up from prior forecasts of $29.7 billion and $1.11, respectively. For fiscal 2010, he expects $118.3 billion in revenue and $4.35 in EPS (up from $116.6 billion and $4.30). His new estimates do not include 3Com.

Wu raised his 12-month price target on HP to $57 from $54.

Brocade Communications Systems (BRCD)

Lazard Capital downgrades to hold from buy

Shares of Brocade Communications Systems Inc. fell in premarket trading Nov. 12 amid market talk the maker of networking gear would be hurt by Hewlett-Packard's acquisition of 3Com. Lazard Capital analyst Ryan Hutchison downgraded his rating on the shares.

Hutchison said the deal dims the prospect of a partnership between HP and Brocade for corporate networking equipment. The acquisition of 3Com will fill "most of the holes" in HP's networking portfolio, he wrote in a research note. Elizabeth Arden (RDEN)

SunTrust Robinson Humphrey upgrades to buy from neutral

The worst is behind Elizabeth Arden Inc., SunTrust Robinson Humphrey analyst William Chappell said on Nov. 12 as he upgraded his rating on the shares, citing cost savings and sales opportunities at Wal-Mart Stores.

Chappell said the company's purchase last year of Liz Claiborne's fragrance portfolio boosted Elizabeth Arden's U.S. and international opportunities. "These products not only gave Elizabeth Arden a strong set of top-selling products such as Juicy, Usher and Curve, but they also enabled the company to expand distribution of these products to its international channels," Chappell wrote in a client note.

Chappell also said the company continues to save costs. The company expects to generate between $10 million and $12 million in cost savings by fiscal 2011, or between 25 cents and 30 cents per share annually, Chappell said.

Chappell also said Wal-Mart Stores' Project Impact program will boost sales for all fragrances over the next few years. Under the new format, fragrances have between 20 percent and 30 percent more shelf space. Fragrances have also been relocated to a more prominent position at the front of the store. "Elizabeth Arden has indicated that it is already seeing double-digit same store sales improvement in the reformatted stores," Chappell said.

CKE Restaurants (CKR)

SunTrust Robinson Humphrey downgrades to neutral from buy; cuts price target

SunTrust Robinson Humphrey analyst Christopher O'Cull on Nov. 12 downgraded shares of CKE Restaurants, which owns and operates the Carl's Jr. and Hardee's fast food chains, saying that sales are sluggish at stores open more than a year. O'Cull said that he's not sure when sales will improve.

The company on Nov. 11 said sales at stores open more than a year declined 3.7% in its fiscal third quarter. The key performance metric declined 5.2% at Carl's locations and 1.8% at the Hardee's chain during the quarter.

O'Cull also said that the company may have a tough time improving breakfast sales, given McDonald's (MCD) promotions and low prices. "Given the weakening trend, we believe margin and earnings could fall short of Street expectations for fiscal 2011," O'Cull wrote in a note to investors. The company is scheduled to post third-quarter results around Dec. 8.

O'Cull cut his share price target to $9 from $11, which implies shares still have room to rise 5.4 percent from the Nov. 11 close of $8.54.

Tetra Tech (TTEK)

Janney Montgomery Scott keeps buy

Janney analyst Debra Coy said on Nov. 12 that engineering and construction services firm Tetra Tech fourth-quarter EPS of 33 cents beat her estimate by one cent. But the bigger story, according to Coy, was the company's 2010 EPS view of $1.25-$1.35, vs. the Wall Street consensus forecast of $1.37 and her $1.33 estimate. Coy believes the company's cautious outlook reflects continued delays in the release of U.S. government work, as well as continued weakness in commercial building-related work, which is hurting Tetra's capacity utilization and margins.

The analyst awaited more details from a Nov. 12 conference call. Until then, she maintained her buy rating, especially on price dips, as she thinks Tetra can still generate growth and margins to support a premium valuation. She has a $33 fair value estimate on the shares.

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