Picks of the Week: Apple, AIG, Lilly, BofA
Notable Wall Street analyst opinions on stocks in the news for the week of Nov. 30-Dec. 4:
Citigroup Inc. (C)
Standard & Poor's Equity Research maintains hold
S&P equity analyst Stuart Plesser said in a Dec. 4 note that in the aftermath of Bank of America's (BAC) plan to repay $45 billion in TARP capital received from the U.S. government, there is now additional pressure on Citigroup to follow suit. The biggest incentive, Plesser believes, for Citigroup to repay TARP is to remove compensation constraints that are in place for TARP participants. Plesser said Citigroup may face employee departures after bonuses are paid for 2009.
"Still, we think the government will be loathe to allow Citigroup to repay TARP until the government sells its ownership stake in Citigroup, and the company further demonstrates that chargeoffs have stabilized," the analyst wrote.
Take-Two Interactive (TTWO)
Kaufman Bros. downgrades to sell from buy; lowers price target
Brean Murray downgrades to hold from buy
Shares of Take-Two Interactive Software Inc. plunged ahead of the regular session Dec. 4 after the video game maker lowered its financial outlook again and said it probably won't meet its profitability goals for next year. The news, coming after the close of trading Dec. 3, rattled analysts and investors, who sent Take-Two shares down $3.09, or 28 percent, to $7.83 in premarket trading.
In a note, Todd Mitchell, an analyst with Kaufman Bros., said the outlook is "indicative of broader problems at the company with regards to accountability which we though had gone away." He lowered his price target to $7 from $14.
Take-Two blamed the weak forecast on disappointing sales of its "Major League Baseball" titles. The overall video game industry has weathered a tough year, with consumers cutting back on discretionary purchases. The company's chairman, Strauss Zelnick, said Take-Two won't meet its goal next year of turning an operating profit on an adjusted basis.
For the quarter that ended in October, the company expects to report earnings of 5 cents to 10 cents per share. Its forecast in September called for 30 cents to 35 cents and analysts had been expecting 33 cents. Take-Two is also expecting bigger losses for the full year and the first quarter of fiscal 2010 than Wall Street anticipated. It projects an adjusted loss of $1.10 to $1.15 per share for fiscal 2009, while analysts expected a loss of 84 cents per share. In the fiscal first quarter, it expects to lose 40 cents to 50 cents, compared with the average forecast of a loss of 26 cents.
Brean Murray analyst Andrey Glukhov said the company's "soft" 2010 outlook "is fairly frustrating".
Bank of America Corp. (BAC)
Standard & Poor's Equity Research maintains strong buy
S&P equity analyst Stuart Plesser said in a Dec. 3 note that he thinks BofA's plan to repay $45 billion of TARP capital not only reflects the government's belief in the financial stability of the company, but "also should help ease [its] ongoing search for a replacement for departing CEO Ken Lewis".
In order to repay TARP, notes Plesser, BofA will need to raise $18.8 billion in an equity offering and use its current liquidity plus the shedding of roughly $4 billion of assets to pay the balance. "We think the positives of removing the company from government control outweigh the roughly 10% in share dilution," Plesser said.
Aeropostale Inc. (ARO)
UBS rates neutral; raises estimates, lowers price target
In a Dec. 3 note to clients, UBS analyst Roxanne Meyer noted that apparel retailer Aeropostale's third-quarter earnings of 92 cents per share was slightly better than UBS's forecast of 91 cents and the company's earlier guidance of 90-91 cents. However, said Meyer, the chain's gross margin decelerated despite the increased focus on boosting margins in the third quarter. With increased promotional activity expected in December, further deceleration was likely in the fourth quarter, said the analyst.
While sales growth at the company's PS, Aeropostale and e-commerce businesses could cushion overall sales if comparisons soften, "margin expansion could get tougher given potential for both higher bar to leverage store costs and for higher 2010 second-half sourcing costs," according to Meyer.
The analyst raised her 2009 earnings per share by one cent to $3.21; and her 2010 forecast to $3.48 from $3.37 mainly on store footage growth. But she trimmed her price target on the shares to $34 from $36 on "potential EPS risk".
Eli Lilly & Co. (LLY)
Standard & Poor's Equity Research reiterates hold; raises price target
S&P equity analyst Herman Saftlas said in a Dec. 2 note that he expects Lilly, at its Dec. 10 analyst day, to focus on key growth drivers such as Cymbalta, the diabetes franchise, patent issues, cost-cutting measures and its pipeline. Saftlas sees Cymbalta benefiting from new indications, while recently launched Effient "is making some traction" in the coronary market.
The analyst said his enthusiasm for Lilly shares is tempered by the patent expiration on Zyprexa in 2011, bleeding issues with Effient, and pipeline uncertainties. He raised his price target by $3 to $40.
Barrick Gold (ABX)
UBS maintains buy; raises valuation target
In a Dec. 2 note, UBS analyst Brian MacArthur said that Barrick had completed the elimination of its gold hedges. He noted that on Oct. 28, the company had 1.9 million ounces of gold hedges remaining and $1.5 billion in floating contracts; as of Dec. 1, it had no gold hedges and $0.7 billion in floating contracts.
With the upward trend in gold over the past few years, MacArthur said he believed that investors have penalized Barrick due to its hedges. "With the elimination of ABX’s gold hedges, we note there is potential for ABX to re-rate more in line with its senior gold peers," he wrote.
MacArthur noted that over the next few years as Barrick develops its next generation mines -- Cortez Hills, Pueblo Viejo and Pascua-Lama -- it should add an estimated 2.5 million of production at lower cash costs. He pointed out that Barrick will also have a large capital budget, especially if it pursues all of the additional projects in its pipeline including Cerro Casale, Reko Diq and Donlin Creek.
The analyst hiked his valuation target from $52 to $54.
Kaufman Bros. maintains buy; removes from Focus List
Kaufman Bros. analysts Aaron Kessler and Andrew Connor removed online travel company Priceline from the firm's Focus List as they expect the shares to consolidate recent gains in the near term after having increased 36% in November. The analysts tied the stock's recent gains to "upside to earnings and a strong 4Q outlook".
Kessler and Connor pointed out in a Dec. 1 client note that traffic data remains strong at Priceline and Booking.com. According to industry researcher Compete, Priceline.com traffic increased 42% in October, vs. 48%, year-over-year, in the third quarter, and 35% year-over-year in the second quarter. Also, their analysis of worldwide searches for "Booking.com" on Google indicated that searches have increased 182% year-over-year in the fourth quarter (through Nov. 28) vs. 176% in the third quarter and 147% in the second.
The analysts maintained a $240 price target on the shares.
American International Group Inc. (AIG)
Standard & Poor's Equity Research maintains hold; cuts price target
In a Dec. 1 note, S&P equity analyst Catherine Seifert said she sees concerns over the health of certain AIG insurance units being offset by the announcement that AIG closed its previously announced $25 billion debt exchange with the Federal Reserve Bank of New York as part of its plan to position two life insurance units for a possible sale or public offering.
Seifert said her hold opinion reflects her view that if AIG can retain 75% of its deferred acquisition cost value, tangible common equity per share would climb to $81.60 from a deficit of $162.06 a share at September 30. Her $35 price target, cut $10, assumes the shares trade at a discount to book value.
Apple Inc. (AAPL)
Kaufman Bros. rates buy
Apple Inc. appears to have done well over the Thanksgiving weekend even without steep discounting and despite the release of Windows 7 -- a testament to the resilience of its products, Kaufman Bros. analyst Shaw Wu said on Nov. 30.
Wu said in-the-field checks revealed strong foot traffic at Apple stores even if Black Friday discounts were a "modest" 4% to 10% on a limited set of products. The blockbuster iPhone was not on sale.
Third-party retailers that sell Apple products were more promotional. Discounts at retailers including Best Buy (BBY), Amazon.com (AMZN), Wal-Mart (WMT), and Target (TGT) were as much as 20% compared to 11% to 13% in prior years. Some included gift cards of $50 to $150.
Apple's popularity also is remarkable given that its Mac computers sell at two to three times the price of PCs, he said. Apple has done well given competitive pressure from Windows users who are upgrading to Windows 7.
Wu said it looks like new iMacs and MacBooks are out of stock at certain retailers or in limited supply -- a good sign going into the holiday season. As such, Wu said his sales forecast of 2.9 million Macs in the quarter -- already higher than what other Apple analysts are expecting on average -- is "likely conservative."
He said the release of the Snow Leopard operating system, new iPods and desktop Macs and a potential new product is expected boost sales in coming quarters.
U.S. Bancorp (USB)
RW Baird upgrades to outperform from neutral; raises price target
U.S. Bancorp's stock price makes it an attractive buy for investors, RW Baird analyst David George said on Nov. 30 as he upgraded the shares to the firm's highest investment rating. George also boosted his stock price target by $4 to $29.
U.S. Bancorp shares have slipped 10% since mid-October.
"USB shares trade at what we view as a deserved premium to other banks on our estimates of normalized earnings," George wrote in a note to investors. "Despite this premium, the stock trades at a discount to peers on consensus 2011 EPS estimates, likely due to our view that USB will achieve normalized EPS faster than peers given the companys lower-risk loan book and high pre-provision returns on capital."
The Minneapolis bank is buying small banks, adding to its earnings potential, George said, and increasing its market share through the downturn. He also expects it to be among the first of the big regional banks to raise its dividend.