Stock Picks: Discover, Akamai

Discover Financial Services (DFS)

Sterne Agee upgrades to buy from neutral

Sterne Agee analyst Henry Coffey upgraded Discover Financial Services on Dec. 7, saying loan-loss levels for the credit-card lender will be smaller than previously expected. Coffey also set a price target of $19 per share.

In a research note, Coffey said he expects Discover to report lower losses during the second half of fiscal 2010. Discover's fiscal year ends Nov. 30. Coffey projects Discover's rate of loans written off as not repayable will fall below the unemployment level for the most recent September through November period. Sterne Agee's earnings model predicts a loss rate of 9 percent, but monthly data from the period suggests a rate closer to 8.5 percent of total loans failing, Coffee wrote in the note.

With losses expected to start declining in the second half of 2010, Coffey said Discover should reach its projected earnings potential sometime in the next 18 to 24 months. Coffey projects Discover's earnings potential is $2.40 per share, up from a previous estimate of $2.10 per share.

Akamai Technologies Inc. (AKAM)

Standard & Poor's Equity Research reiterates hold; raises estimate

S&P equity analysts Scott Kessler and Jim Yin said in a Dec. 7 note that the maker of file-management and distribution software raised its fourth-quarter revenue guidance to a range of $230 million-$235 million from $217 million-$224 million previously, citing improved volumes in the media business and better e-commerce-related results, notably during the holiday shopping season. Akamai also raised its non-GAAP earnings guidance to a range of 42 cents-43 cents per share, from 39 cents-41 cents previously.

The analysts believe the revised outlook reflects an economic uptrend, and they expect the sales outlook to continue to improve. "We also think that pricing pressure will abate somewhat," they wrote.

The analysts lifted their 2009 earnings estimate by 3 cents to 79 cents and kept their 2010 forecast at 84 cents. Brocade Communications Systems Inc. (BRCD)

Oppenheimer upgrades to outperform from perform

Shares of Brocade Communications Systems Inc. edged higher in premarket trading Dec. 7 after Oppenheimer analyst Ittai Kidron upgraded the company, saying it could win market share as its rivals try to digest recent acquisitions. Kidron also set a price target of $8.50.

He said Brocade stands to benefit from the distraction from Hewlett Packard Co.'s purchase of 3Com and Avaya Inc.'s acquisition of Nortel's enterprise business. Kidron added that Brocade's contracts to sell IP/Ethernet products to IBM Corp. and Dell Inc. will help the business over a longer term.

Moreover, Brocade generates strong free cash flow from a "stable" business, and is trading below normal levels, the analyst said.

Advance Auto Parts Inc. (AAP)

FBR Capital Markets downgrades to underperform from market perform

FBR Capital Markets analyst Stephen Chick downgraded Advance Auto Parts Inc. on Dec. 7, saying the auto parts retailer's earnings in the fourth quarter and next year may fall short of investor expectations as sales growth slows.

Costly initiatives put in place under CEO Darren Jackson, who took the over the company in January 2008, have not stopped commercial sales growth from slowing since the first quarter, said Chick in a note to investors.

"We debate the payoff and linearity of management's investments," Chick said.

Chick projected profit of 44 cents per share in the fourth quarter and profit of $2.97 per share in 2010.

Chick cautioned that in 2010, the metric could slow to the mid-single digits for commercial sales and decline for do-it-yourself sales. Sales at stores open at least a year are seen as an important retail performance indicator because they measure growth from existing stores rather than newly opened ones.

The analyst also said the chain's per-store sales target was too aggressive.

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