Stock Picks: Disney, Hewlett-Packard, PNC, Brocade

Wall Street analyst opinions on stocks making headlines in Monday's market

Walt Disney Co.: Deutsche Bank analyst Doug Mitchelson reiterated a buy rating on shares of Walt Disney Co. (DIS) on Mar. 7.

The studio's "Alice in Wonderland," the Lewis Carroll tale re-imagined in 3-D by director Tim Burton, made $116.3 million in U.S. and Canadian ticket sales for over the Mar. 5-7 weekend, the sixth-biggest opening ever. The movie also set other records: the biggest debut for March and for a 3-D film, the largest opening weekend for the year, and the best-ever Imax opening, Box-Office said.

In a Mar. 7 note, Mitchelson said the film grossed $210 million worldwide, leading him to a "very preliminary" ultimate profit estimate of $200 million. The analyst noted that it typically takes two to three weekends to make an accurate forecast.

"In our view, this kicks off a content recovery for Disney, which has been in an 18-month dry spell with duds like 'Bedtime Stories', 'G-Force' and 'A Christmas Carol', and overcoming tough comps against 'High School Musical'," the analyst wrote. "Looking forward, we believe Disney's line-up has as much assurance of success as the movie business allows, with films like 'Toy Story 3' (June 18) this summer, 'Cars 2' (July) and 'Pirates 4' (July) [in 2011], and two original Pixar movies in 2012, the first time 2 Pixar movies will be released in a single year".

He also noted that new studio management has "aggressively addressed costs ... including essentially shutting down Miramax". Mitchelson said he believes Disney's stock has "significant upside".

The analyst has a $39 price target on Disney shares.

Hewlett-Packard Co.: Thomes Weisel Partners analyst Doug Reid reiterated his overweight rating on shares of Hewlett-Packard Co. (HPQ) on Mar. 8.

On Mar. 5, the world's largest personal-computer maker revised its first-quarter results, cutting profit by 3 cents a share, after a U.K. lawsuit against its Electronic Data Systems unit increased its legal costs. The new net income figure is $2.25 billion, or 93 cents a share, down from the $2.32 billion, or 96 cents, reported on Feb. 17. Excluding some costs, the profit was $1.07 a share, compared with $1.10 in the earlier report.

Hewlett-Packard increased its legal reserve fund after a London court ordered EDS to make an interim payment of about $112 million to British Sky Broadcasting. The court ruled in BSkyB's favor in a dispute over a services contract between the companies. Justice Vivian Ramsey said EDS was liable for "fraudulent misrepresentation giving rise to damages."

"The revision is unrelated to H-P's strong business performance in the first quarter," the company said in an e-mailed statement on Mar. 5.

"We do not expect the increased contingency reserve to impact our future HPQ EPS estimates", wrote Reid in a Mar. 8 note, because the company has adequate reserves in place, in our opinion". Reid said he believes the current litigation will have no impact on his revenue and EPS growth outlook for the company.

The analyst maintained his second-quarter revenue and non-GAAP EPS estimates of $29.57 billion and $1.04, respectively. Reflecting the restated January quarter results, Reid reduced his full year fiscal 2010 EPS estimate from $4.40 to $4.37. He maintained his revenue and EPS estimates of $128.7 billion and $4.89 for fiscal 2011.

Reid said he estimates that Hewlett-Packard will end the April quarter with a total cash and investment balance of $23.2 billion, vs. his prior estimate of $23.6 billion. "We do not expect the payments to have a material impact on HPQ's cash balance," the analyst wrote.

The analyst has a $60 price target on the shares.

PNC Financial Services Group Inc.: FBR Capital Markets analyst Paul Miller raised his rating on shares of PNC Financial Services Group Inc. (PNC) to outperform from market perform on Mar. 8.

Miller said in a note that the Pittsburgh-based banking company announced on Feb. 2 the sale of $3 billion of common equity and the planned sale of its investment servicing business as part of a capital plan to repay the $7.6 billion TARP investment. Miller said the expected boost to tangible common equity shifted its risk profile "to low risk from medium risk".

"We expect this upgrade to be somewhat controversial due to investor concern surrounding the lower quality of earnings driven by purchase accounting accretion", Miller wrote, which he figured added $3.17 to his $3.63 fiscal 2009 operating EPS estimate. "While we acknowledge that this earnings stream is lower quality," Miller said. The analyst said he believes that nearly $1.50 of this accretion can be recaptured as it stems from higher-cost CDs, which are transitioning into lower-cost core deposits at a rate greater than PNC's initial expectations, and as the non-credit-impaired loan customers refinance or reprice into normal balance sheet loans.

"PNC also has some of the strongest credit metrics relative to peers, which we believe should limit downside risk from current levels," the analyst wrote. He said that if PNC recaptures any of the accretion from the non-credit-impaired portfolio, "it should provide upside to our estimated $5.00 to $6.00 range of 'normal' EPS".

Miller lifted his price target on the shares to $65 from $55.

Brocade Communications Systems Inc.: Bank of America Merrill Lynch analyst Scott Craig reiterated his buy recommendation on shares of Brocade Communications Systems Inc. (BRCD) on Mar. 8.

In a note, Craig said he was lowering estimates on the maker of networking gear that connects storage computers as he expects the company's sales focus to shift from the storage business to the IP/Ethernet market in the fiscal 2010 second quarter, and "given transitions can be challenging, we are now being a little more conservative".

The analyst said he expects Brocade to report fiscal 2010 revenue growth of 7%, vs. the company's guidance of 8% to 12%. "We expect downward pressure on margins predicated on more aggressive pricing in the IP/Ethernet business, lower overall volume, and incremental investments in the IP/Ethernet business," Craig said.

Craig cut his fiscal 2010 revenue estimate to $2.08 billion from $2.12 billion, and expects fiscal 2011 revenue of $2.28 billion. He lowered his fiscal 2010 EPS estimate to 54 cents from 55 cents on the lower revenue outlook. He reduced his fiscal 2011 EPS estimate to 59 cents from 62 cents on his expectation of a higher tax rate (28%, vs. 25% to 26% in fiscal 2010) and lower revenues.

The analyst maintained his price objective of $8 on the shares.