Stock Picks: Google, AmEx, Capital One

Google Inc. (GOOG)

Stifel Nicolaus reiterates buy

Google Inc., owner of the world's most popular search engine, reported fourth-quarter sales that fell short of some analysts' estimates after the close of trading Jan. 21. Net income rose to $1.97 billion, or $6.13 a share, from $382.4 million, or $1.21, a year earlier when Google wrote down $1.09 billion of investments. Excluding revenue passed on to partner sites, sales totaled $4.95 billion.

Google shares slid 3.25% to $564.05 as of 9:59 a.m. ET on Jan. 22.

Stifel Nicolaus analyst George I. Askew reiterated a buy rating on the shares on Jan. 22, noting that Google's 2009 fourth-quarter results were strong despite "the market's initial knee-jerk reaction". Askew said in a note that growth in clicks was in line with consensus estimates while cost-per-click "surprised on the upside" as advertiser demand pushed auction pricing, and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margins expanded 240 basis points year-over-year as cost cutting and high incremental margins support operating leverage.

"However, Google did not beat the top end of analyst revenue ex-TAC [revenue excluding amounts passed on to partner sites] estimates and other high expectations," which Askew said he believed was the cause for the decline in the shares in after-hours trading Jan. 21.

The analyst said Google "is much more than an improving economy story", as it is is innovating in huge markets including the online display advertising market, which represents about one-third of $54 billion global online advertising spending. Also, "Google is literally building a global mobile platform with scale that should eventually support the company's ambitious advertising monetization strategies," the analyst said, adding that the global mobile advertising market, currently at about $1.5 billion, is expected to top $10 billion "in perhaps three years".

Askew set first-quarter estimates of ex-TAC revenues of $4.875 billion; adjusted EBITDA of $3.0398 billion; and cash earnings per share of $6.43. His adjusted 2010 forecast calls for ex-TAC revenues of $20.610 billion; adjusted EBITDA of $12.923 billion; and cash EPS of $27.63. For 2011, he estimates ex-TAC revenues of $23.401 billion; adjusted EBITDA of $14.395 billion; and cash EPS of $31.31.

The analyst also maintained his $650 price target.

American Express Co. (AXP)

RBC Capital Markets reiterates underperform; raises price target

American Express Co., the biggest U.S. credit-card issuer by purchases, said after the close of trading Jan. 21 that fourth-quarter profit more than doubled amid a surge in customer spending and lower expenses for future defaults. Income from continuing operations climbed to $710 million, or 59 cents a share, from $306 million, or 26 cents, in the same period in 2008, New York-based AmEx said in a statement.

AmEx shares fell 4.38% to $40.32 as of 10:00 a.m. ET on Jan. 22.

RBC Capital Markets analyst Jason Arnold reiterated an underperform rating on the stock on Jan. 22, saying that he views the shares as overvalued relative to his future return outlook.

The analyst noted that managed charge-offs fell to 7.3%, compared to 8.6% in the 2009 third quarter, while the loss provision declined "meaningfully" to $748 million, vs. $1.2 billion in the prior quarter, driven by a reserve release and better credit trends in both loans and charge receivables. "While the improvement is a welcome sign, we remain concerned that credit pressure will remain high while economic challenges persist," the analyst wrote in a note.

Arnold lowered his estimate for core earnings per share in 2010 to $2.19 from $2.31, largely due more a moderate credit performance outlook offset by exclusion of revenue from a litigation settlement with Visa and MasterCard. He raised his 2011 EPS estimate "modestly" to $2.34 from $2.19.

"While conditions may have stabilized, broader economic challenges will likely weigh for some time ahead for the consumer, and for American Express as well, in our view," Arnold wrote.

The analyst raised his price target on the shares to $31 from $28.

Capital One Financial Corp. (COF)

Standard & Poor's Equity Research downgrades to hold from buy; lowers price target

Capital One Financial Corp., the third-biggest issuer of Visa credit cards, said after the close of trading Jan. 21 that it posted a fourth-quarter profit as the credit-card business made money and the bank decreased reserves for bad loans. Net income was $376 million, or 83 cents a share, compared with a loss of $1.45 billion, or $3.74, in the year-earlier period, the McLean, Virginia-based company said.

Capital One shares slid 9.23% to $38.76 as of 10:00 a.m. ET on Jan. 22.

S&P equity analyst Rafay Khalid lowered his rating on the shares on Jan. 22 on a reduced profit outlook for the company. He said in a note that Capital One's operating EPS of 89 cents a share, vs. a $3.67 loss per share one year earlier, was better than his 45 cents estimate, reflecting lower loss provisions. Khalid said he forecasts provisions to drop in 2010 on his view of stabilizing delinquency rates. "But we believe earnings will fall on our outlook for lower average earning assets and higher expenses," the analyst wrote.

Khalid reduced his 2010 operating EPS forecast by 24 cents to $1.53 and introduced a 2011 forecast at $1.72. He lowered his 12-month price target by $3 to $45.