Stock Picks: Citigroup, Kraft

Plus Wall Street analyst opinions on Ciena and JDS Uniphase

Citigroup Inc. (C)

Deutsche Bank maintains buy

Citigroup Inc., the U.S. bank that is 27% owned by the Treasury Department, reported a $7.6 billion fourth-quarter loss (33 cents per share) on Jan. 19 from costs to exit the government’s bailout program.

Deutsche Bank analyst Matthew O'Connor said on Jan. 19 that while there were some disappointments in Citi's report, including a lower net interest margin, he believes there were several positives which show Citi "is making meaningful progress in its turnaround". "With the stock trading at a 20% discount to tangible book and capital/reserves the highest in the industry we continue to believe the risk/reward is favorable (despite the government ownership overhang)," he wrote.

O'Connor noted that Citi's credit costs declined 10% quarter-over-quarter (after declining 28% last quarter), vs. expectations of a slight increase; and that the bank's Tier 1 common ratio was slightly higher than expected at 9.6% (loan loss reserves were 6.1% of loans).

On the negative side, O'Connor said that Citi's net interest margin declined 30 basis points, quarter-over-quarter, after a large decline in the third quarter. Also, expenses rose slightly from the previous quarter despite lower revenue and the continued run-off of troubled assets from the Citi Holdings unit, the analyst said.

O'Connor has a price target of $5.50 on Citi shares.

Kraft Foods (KFT)

Standard & Poor's Equity Research upgrades to hold from sell; raises target price

Cadbury Plc's board agreed to an 11.9 billion-pound ($19.7 billion) takeover offer from Kraft Foods on Jan. 19.

S&P equity analyst Thomas Graves raised his opinion on shares of Kraft, the maker of Oreo cookies and Toblerone chocolates on Jan. 19, saying he expects its increased offer will be enough to acquire Cadbury; he looks for deal to close in the first quarter. "We do not expect [a] higher offer from Hershey (HSY) or anyone else," Graves wrote in a note.

The analyst sees Cadbury offering strategic value for Kraft, including opportunities in developing international markets. With less concern about how much Kraft would pay, plus a higher estimate on the cost-saving synergies the deal would generate, Graves sees reduced risk in Kraft shares. He raised his 12-month target price to $30, from $25, noting that Kraft's indicated dividend yield is 4.0%.

Ciena Corp. (CIEN)

Credit Suisse upgrades to outperform from neutral; raises price target

Credit Suisse analyst Paul Silverstein raised his rating on shares of Ciena on Jan. 19, saying he expects ongoing momentum in revenue growth together with improved operating leverage at the provider of communications networking equipment, software, and services.

Over the longer term, while he does not expect the integration of the metro Ethernet networks (MEN) business the company acquired from Nortel to be "trivial", Silverstein believes it has meaningfully improved Ciena's competitive position and significantly attenuated its customer concentration.

The analyst sees Ciena posting a fiscal 2010 operating loss of 42 cents per share, with operating earnings of 70 cents per share in fiscal 2011; he set a $1.19 fiscal 2012 operating EPS estimate. He raised his $15.50 price target to $19.

JDS Uniphase (JDSU)

RBC Capital Markets upgrades to outperform from sector perform; raises estimate, price target

RBC Capital Markets analyst Mark Sue raised his rating on shares of JDS Uniphase on Jan. 19, based on his view that the company's key business segments of test & measurement equipment, and optical components, may see a broad recovery this year. Sue noted that recent quarters have been "lumpy" and "sequential growth won't be smooth", but he said he believes wireline and wireless growth drivers may enable the company to post improving revenue, earnings per share, and cash generation.

Sue said in a note that "with product pruning, lean manufacturing and cost control, JDSU may enter a period of operating margin improvements". He raised his calendar 2011 EPS estimate to 50 cents from 42 cents, and his price target on the shares to $12 from $10.

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