Picks of the Week: Yahoo, FedEx, AOL, Citi

Notable Wall Street analyst opinions on stocks in the news for the week of Dec. 7-Dec. 11: Dec. 11

Yahoo Inc. (YHOO)

Kaufman Bros. upgrades to buy from hold; raises price target

Kaufman Bros. Aaron Kessler upgraded Yahoo on Dec. 11, saying its fundamentals are improving and its search engine is doing better than suggested by a leading research firm. Kessler wrote in a note to clients that checks with ad agencies and recent comments by Yahoo executives point to continued improvement in display ad demand and prices in the fourth quarter. He also believes Internet users are clicking more often on Yahoo search ads, counterbalancing a loss of share in the number of searches it attracts.

An expected regulatory approval in the first quarter of Microsoft Corp.'s () deal to take over Yahoo's search engine could also boost the shares by about $2 each, Kessler wrote.

Kessler raised his price target on the stock to $20 from $19. His pricing model excludes the potential effect of the Microsoft deal.

Walt Disney Co. (DIS)

UBS maintains buy; raises price target

Disney shares should outperform those of its media peers over the next twelve months, with an estimated total return of 22% over that period, wrote UBS analyst Michael C. Morris in a Dec. 11 note. He believes investor interest in Disney will rise in the coming months "as enthusiasm for early cyclical stocks wanes and comfort with the stability of core consumer trends stabilizes".

Morris cited three factors for his 2010 view: Disney's attractive valuation, above average growth, and upward revisions to earnings forecasts. He also sees a number of factors driving results in 2011-12 above analyst consensus estimates, including a "robust" film slate featuring Pixar and Marvel films, the launch of two new Disney cruise ships that will more than double capacity, modestly improving park attendance and core advertising trends, the potential for retransmission consent at the ABC Network and stations, and a stronger consumer products pipeline.

The analyst raised his price target on Disney shares to $38 from $33.

Dec. 10

AOL Inc. (AOL)

Merriman Curhan Ford initiates at sell Broadpoint AmTech rates neutral

AOL Inc. will start trading as an independent public company Dec. 10 after nearly a decade with Time Warner Inc. (TWX) -- and some analysts are already panning the stock.

The spinoff is likely to help boost Time Warner Inc., eliminating "a continual source of investor frustration" for the New York media conglomerate, BMO Capital Markets analyst Jeffrey Logsdon said in a client note.

AOL, meanwhile, has an uphill climb. "All of the company's segments are in decline," Merriman Curhan Ford's Richard Fetyko told investors in a note. He pointed out that AOL's long-declining dial-up subscriber base is likely to drag down visits to the company's Web sites. And that means fewer ad dollars -- the revenue stream AOL is counting on for its second act.

AOL has about 5.4 million Internet subscribers, down from a peak of 26.7 million in 2002. As that base continues to erode, it is looking to improve its Web sites and wring more advertising money from them.

Benjamin Schachter, of Broadpoint AmTech, has doubts about the strategy. In a note Tuesday, he pointed to traffic declines over the past nine months at AOL's Internet properties. "If the new management team cannot fix user engagement," he said, "most of the other initiatives will not mean much."

T. Rowe Price Group Inc. (TROW)

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

T. Rowe Price Group Inc. was upgraded by Jefferies & Co. analyst Daniel Fannon on Dec. 10. The analyst said the asset manager is poised to grow significantly when more investors jump back into the stock market.

Fannon also raised his price target to $60 from $54. He said in a research note that T. Rowe Price will add to its market share as more customers ratchet up their investments. As the economy recovers and customers become more comfortable with their own financial positions, it is expected they will shift money into riskier investments. That will help T. Rowe Price, Fannon said.

Even with investors remaining risk averse right now, Fannon said T. Rowe Price is still able to grow at "an above average rate" because of its fixed income investment options.

Fannon forecasts T. Rowe Price will earn 57 cents per share in the fourth quarter and $2.53 per share in 2010.

Dec. 9

FedEx Corp. (FDX)

UBS maintains neutral; raises price target

After the close of trading Dec. 8, FedEx announced that fiscal 2010 second-quarter earnings will come in at $1.10 per share, significantly higher than the prior guidance range of 65 cents-95 cents. UBS analyst Rick Paterson raised estimates on the package-delivery company on Dec. 9.

Paterson said in a note to clients that the upside vs. FedEx's original expectations was driven by better than expected growth in international priority and domestic ground parcel shipments, and cost cutting. He raised earnings estimates for fiscal 2010 (ending May) from $2.99 per share to $3.56 per share and for fiscal 2011 from $4.03 per share to $4.50 per share.

"Our customer surveys show no indications of an inventory restocking on a broad scale, yet," wrote the analyst.

Paterson raised his one-year price target on the shares from $91 to $99.

CA Inc. (CA)

Deutsche Bank upgrades to buy from hold; raises price target

Deutsche Bank analyst Todd Raker upgraded CA Inc. on Dec. 9, saying the business software company is poised to benefit from opportunities in the new technologies of virtualization and cloud computing. Raker also increased his target price on the company's shares to $28 from $22.

Virtualization helps companies save money on power and equipment by enabling a single computer to function like multiple machines. Cloud computing is centered on the idea of running software from remotely hosted computers rather than on the user's own machine.

Raker said that as cloud computing starts to see "significant adoption" by businesses, managing how it is used will become increasingly important. Cloud computing leads to increased service and elevated security requirements for the companies that use them, and CA's "product portfolio is well positioned to benefit," the analyst said.

"We think the Street does not fully appreciate the virtualization/cloud computing management opportunity," Raker added. Dec. 8

Citigroup Inc. (C)

Standard & Poor's Equity Research maintains hold

According to an unconfirmed Wall Street Journal report on Dec. 8, the U.S. government is requiring Citigroup Inc. to raise $20 billion to repay TARP capital. S&P equity analyst Stuart Plesser said in a Dec. 8 note that he thinks a capital raise would significantly dilute shareholders and that Citigroup will refrain from an issuance until after the government sells its stake in the company.

Separately, noted Plesser, the report stated that the government is requiring Wells Fargo (WFC) to raise "billions" of dollars to repay TARP. "We don't think WFC is in any rush to repay TARP as compensation restraints associated with TARP are likely not as big of an issue for WFC compared to C," wrote Plesser.

Research in Motion Ltd. (RIMM)

Kaufman Bros. reiterates buy

After the close of trading Dec. 7, Research in Motion Ltd. announced an enhanced strategic partnership with China Mobile where it will support TD-SCDMA (3G) and TD-LTE (4G) wireless technologies as well as market BlackBerry smart phones to the enterprise, small business, and consumer markets. Kaufman analyst Shaw Wu said in a Dec. 8 note that while it is unclear if the deal is exclusive or precludes other deals, "it at least gives [RIM] a first-mover advantage at the largest carrier in China with 508 million subscribers."

Wu left his estimates of $14.5 billion in revenue and $4.08 in earnings per share for fiscal 2010 (vs. the Wall Street consensus forecasts of $14.9 billion and $4.15) and $17.1 billion in revenue and $4.75 in EPS for fiscal 2011 (vs. $18.2 billion and $4.82).

Wu believes "the addition of China as a growth opportunity gives RIM a greater chance of delivering if not exceeding our estimates." He has a price target of $93 on the shares.

Dec. 7

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.

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.

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