Stock Picks: Amazon, Exxon Mobil (AMZN)

Collins Stewart raises to buy from hold

Wall Street is underestimating the contribution the Kindle electronic book reader will make to profits at (AMZN), Collins Stewart analyst Sandeep Aggarwal said in a Feb. 8 report.

"We believe the eBook revolution is much bigger than we and [Wall] Street previously thought," Aggarwal wrote, upgrading the stock from hold to buy. Amazon shares have fallen 15% from their peak, giving investors an "attractive entry point," he said. He gave Amazon a price target of 150. Shares currently trade at 119.

Competition for the Kindle is mounting. There are now more than 45 eReaders, including the newest entrant, Apple's (AAPL) iPad. However, Aggarwal estimates Amazon could ship 3.85 million Kindles in 2010 and generate $2.5 billion in Kindle-related revenue.

Wal-Mart Stores (WMT) and eBay (EBAY) are trying to compete more effectively with Amazon's online commerce platform, but Aggarwal said Amazon retains an advantage. The company "remains the gold standard with operation excellence, scale, and customer satisfaction second to none," he wrote.

Exxon Mobil (XOM)

Collins Stewart raises to buy from hold; raises target price to $80

Investors have taken their distaste for Exxon Mobil's $41 billion purchase of natural gas producer XTO Energy (XTO) beyond reason, with Exxon shedding nearly $40 billion in market capitalization since the December deal was announced, Collins Stewart analyst Katherine Lucas Minyard wrote. As a result, the value of the combined company would be only $200 million more than Exxon Mobil's value just before the deal was announced, she noted.

"Although in general we expect share price weakness upon a company's announcing an acquisition, the magnitude of XOM's selloff suggests to us that negative investor sentiment has now gone too far," Minyard said.

Apart from the value of the shares, the analyst sees opportunity for Exxon's organic production growth rate above 5% to outpace rivals such as Chevron (CVX) and ConocoPhillips (COP). She also boosted her target price on the stock to $80, the company's 52-week high, last reached in February 2009. Exxon Mobil currently trades at $65. "At this point, we see XOM as offering the most compelling risk-reward balance in our coverage universe," Minyard wrote.

Dun & Bradstreet (DNB)

J.P. Morgan downgrades to neutral from overweight; cuts target price to $80

Wary of Dun & Bradstreet's plans to spend as much as $130 million on technology upgrades, J.P. Morgan analyst Michael Meltz lowered his rating on the business analytics company to neutral from overweight. He also cut his December 2010 target price on the stock from $87 to $80. Shares currently trade at $72.

Dun & Bradstreet on Feb. 4 reported quarterly income that was down 16% from a year earlier as revenue from North America fell. The company further expects North American sales to slip slightly in 2010, although international revenue is expected to be strong.

"While we could digest [a second half of 2010] recovery story (or even early-2011), a 2012 story with potential execution challenges is a bigger issue," Meltz wrote in a Feb. 8 note. "We've been around D&B long enough to understand and appreciate the cost 're-engineering' process. And we're fairly confident there hasn't been a significant underinvestment in recent years—we do believe that management is attempting to differentiate vs. competitors and enhance [long-term] prospects. We're well aware that the stock underperformed in 2009 (up just 9%) and is down 12% since December. And new CEO Sara Mathew has ample incentive to reset the bar to exceed objectives."

Southern Copper (PCU)

Credit Suisse upgrades to outperform from underperform; raises target price to $34

Credit Suisse analyst Ivan Fadel boosted the rating on Southern Copper to outperform from underperform and raised his target price to $34 from $31.50 a share, allowing for a 22% upside from the closing price on Feb. 5.

In a Feb. 8 research note, Credit Suisse said the company's stock performance is highly correlated to copper prices, and both slumped over the past few weeks. Prices of industrial metals and other commodities have fallen since the Chinese government announced moves intended to prevent its economy from overheating. On Feb. 5, Southern Copper's shares finished at $27.79, down nearly 21% from $34.51, their closing price on Jan. 13, the day after China ordered higher bank reserves for potentially failing loans and stricter lending standards.

"We believe copper fundamentals remain robust, buoyed by strong Chinese consumption and a gradual recovery in the ex-China world," the Credit Suisse note said. "In our view, any signs of supply disruption (strikes and project delays) might reinforce the notion of market tightness and higher copper prices."

On Jan. 29, Southern Copper reported a swing to a fourth-quarter profit of $363 million, or 43¢ a share, from a net loss of $124.7 million, or 14¢ a share, a year ago, on a nearly 153% jump in net sales, to $1.14 billion. Higher copper prices and a significant increase in the amount of molybdenum and silver produced and sold were key contributors to the improved results.

In its earnings release, the company said its board had approved a $2.8 billion investment program for the next three years to develop new production capacity. The program is expected to increase annual production by 342,000 tons of copper and 6,600 tons of molybdenum and to boost the company's cost competitiveness and efficiency. Southern Copper plans to allocate about $1.8 billion to Peru and $1 billion to Mexico, with roughly $600 million and $200 million to be invested in Peru and Mexico, respectively, in fiscal year 2010.

The main catalysts for the upside in Southern Copper's shares, said Credit Suisse, are strong growth in production volume throughout 2010 to 2014, higher copper prices, strong earnings growth in the next two years, and an attractive portfolio of projects, with little capital spending per ton and low operating costs.

Fadel said that he expects the company almost to double its copper output from 2010 through 2014 and achieve a roughly 19% compound annual growth rate over that period. Copper prices will rise on a tight supply-demand balance, aided by potential supply disruptions, such as strikes and project delays. Fadel is projecting 66% earnings growth in 2010 and 42% growth in 2011. The stock has a price-to-earnings multiple of 13x for 2010 and a multiple of 8.8x for 2011, with the "impressive multiples compression stem[ming] from a combination of a strong growth in copper sales and rising metal prices." In addition, the recent sell-off provides a good entry point for investors, the note said.

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