Stock Picks: Apple, SunTrust

Apple Inc. (AAPL)

Kaufman Bros. reiterates buy

Apple Inc., maker of the iPhone, was expected to report December-quarter results after the close of trading Jan. 25. Kaufman Bros. analyst Shaw Wu said on Jan. 25 that since he raised his estimates on Apple to well above the consensus of Wall Street analysts in late December, "Street estimates have increased". Wu said in a note that his estimates of $12.4 billion in revenue and $2.15 earnings per share remain well above the respective consensus estimates of $12 billion and $2.07. Wu said he believes there is potential for upside to his estimates.

Based on conversations with investors and a review of consensus data, Wu said Wall Street appears to be expecting Apple to ship 21 million iPods, 8.9 million iPhones and 3 million Macs, vs. his respective forecasts of 22 million, 9.5 million, and 2.9 million Macs. Wu said there is particular upside potential in the iPhone business, where "we will likely see a new quarterly shipment record".

Wu said his sources indicate "continued strong momentum for the iPhone business in the U.S., a strong uptake in Europe due to multiple carriers and more attractive prepaid service plans; and a material contribution from Asia-Pacific (China and Korea)." The analyst said he is concerned that production issues impacting new iMacs could limit upside for the product line.

For the March quarter, Wu said he was modeling $9.8 billion in revenue and $1.55 in EPS, vs. the consensus expectation of $10.4 billion and $1.77.

"We continue to believe that Apple is positioned to outperform in this tough macroeconomic environment with its defensible strategic and structural advantages and its vertical integration," Wu wrote.

The analyst has a $253 price target on Apple shares.

SunTrust Banks (STI)

Stifel Nicolaus downgrades to sell from hold; lowers estimates

SunTrust Banks Inc., the Georgia lender that received $4.9 billion in U.S. bailout funds, said on Jan. 22 that it posted a $248.1 million loss in the fourth quarter as loans soured in the Southeast real-estate market. The net loss, equal to 64 cents a share, compared with a loss of $347.6 million, or $1.07, a year earlier.

Stifel Nicolaus analyst Christopher Mutascio lowered his rating on SunTrust on Jan. 25, saying the stock now trades at the highest price-to-normalized earnings (which assumes capital raises to repay TARP funds) of any large-cap bank that he follows. "We have a hard time justifying such multiples given that we believe the company will post rather substantial losses over the next several quarters," the analyst wrote.

Mutascio lowered his earnings per share estimates to a loss of $1.50 from a loss of 80 cents for 2010 and to a gain of 65 cents from a gain of $0.75 for 2011. He said the sharp reduction in his 2010 EPS estimate was driven by weaker than expected core pre-tax pre-provision earnings trends and his assumption that TARP preferred capital will not be repaid in 2010.

"We would much rather accumulate stocks of banks that have already repaid TARP, have positive near-term earnings prospects and are trading at reasonable earnings multiples," the analyst wrote. The analyst mentioned Wells Fargo (WFC), Bank of America (BAC), and US Bancorp (USB) as examples.

Qwest Communications International Inc. (Q)

Standard & Poor's Equity Research maintains hold

S&P equity analyst Todd Rosenbluth said on Jan. 25 that ahead of the release of telecom services provider Qwest Communications' fourth-quarter results in mid-February, he was maintaining his forecast for $3.07 billion in revenues, $1.07 billion in EBITDA (earnings before interest, taxes, depreciation and amortization) and 8 cents in EPS. "We look for modest revenue growth in its business segment to be offset by pressure in mass markets and wholesale," the analyst wrote in a note. Rosenbluth noted that Qwest recently restructured its debt to extend maturities, which "we believe alleviates some of its credit-related risks".

Rosenbluth also said he thinks Qwest's dividend, yielding 7.4%, is well supported by the company's cash flow, even as capital is spent to grow its broadband business. He maintained his 12-month price target of $4.

Eaton Corp. (ETN)

Wells Fargo maintains market perform

Eaton Corp., the Cleveland-based maker of hydraulics and automotive valves, posted a fourth-quarter profit of $1.35 a share on Jan. 25. Sales fell 10% to $3.13 billion, with declines at all business units except the truck division and the automotive unit. Eaton forecast first-quarter profit excluding some items of 75 cents to 85 cents a share.

Wells Fargo analyst Andrew Casey said on Jan. 25 that Eaton generated significant EBIT (earnings before interest and taxes) margin improvement against continuing difficulties in its end markets. He noted that the company's net EPS of $1.25 included 10 cents of acquisition integration charges, and about 7 cents of unusual charges, net of lower-than-expected tax. Excluding integration charges, said Casey, Eaton's adjusted EPS of $1.35 grew 25% year-over-year, beating both his $1.26 estimate and the Wall Street consensus estimate of $1.23.

Casey said Eaton sees 2010 EPS of $3.70-$4.00, above his $3.65 estimate.

The analyst expected Eaton's report to be positive for its stock. Casey maintained a $65-$68 price target on the shares.