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Stock Picks: BlackRock, Global Payments, Millicom

Stock Picks: BlackRock, Global Payments, Millicom

(The story has been updated to clarify an ambiguous phrase about the final stock pick.)

BlackRock: Citigroup (C) analyst Keith Walsh downgraded BlackRock (BLK) to a sell from a buy rating, and analyst Michael Carrier at Deutsche Bank lowered his rating to hold from buy. Deutsche Bank cited the investment firm's outperformance over the past year and lower expected earnings growth in the future due to less margin expansion and some near-term challenges.

Citigroup views the stock as overvalued and predicts a meaningful correction as Wall Street consensus estimates need to be revised based on the earnings contribution from Barclays Global Investors (BGI), which BlackRock acquired in December, and higher investment spending. Since fourth-quarter earnings included only one month's contribution from BGI, Citigroup expects analysts' earnings estimates to drop 5% to 10% for each of the next three years as the run-rate earnings contribution from BGI becomes clearer. Fund managers have even more optimistic earnings expectations for 2011 and 2012, which will need to reset to the likelihood of smaller margins, Citigroup said in a Mar. 31 note.

Despite projected cost savings from BGI's integration, BlackRock's management expects margins to stay flat as a result of reinvesting in the business for long-term growth, Deutsche Bank said in a Mar. 31 research note. Deutsche Bank sees the long-term focus as the right one but said that means revenue growth will be more important as an earnings driver in the short term, and the company's large asset base and challenges will make growth harder to achieve. Near-term pressures include significant money market flows, offset by a favorable mix shift, quantitative outflows, seasonally weak money flows into exchange-traded funds, and potential pressures in the debt markets due to rising interest rates, partially offset by rising markets, according to Deustche Bank's note.

Citigroup cut its 2010 adjusted earnings estimate to $10.25 from $11.00 a share, its 2011 outlook to $11.68 from $12.80, and its 2012 forecast to $13.16 from $14.00. The revisions reflect lower money flows and higher investment spending from both legacy BlackRock and BGI. Deutsche Bank cut its 2010 earnings forecast to $10.95 from $11.25 a share and lowered its 2011 estimate to $12.85 from $14.00. The revised forecasts assume around 5% internal profit growth, average market returns, and 1.5% to 2.0% margin expansion. Deutsche Bank also cut its target price to $235, from $260, based on a multiple that is 21 times its 2010 earnings estimate.

Deutsche Bank said BlackRock is well-positioned for long-term growth due to a diversified product mix across asset classes, geographies, active/passive strategies, and advisory/risk management services. The money manager will also benefit from a strong distribution network, mostly positive long-term investment performance, and healthy cash-flow generation. Citigroup sees significant room for growth in BlackRock's retail business over time, citing an imminent launch of a renewed branding campaign for both BlackRock and iShares (the BGI franchise) as well as a new alliance with Fidelity to sell flagship iShares ETFs.

Global Payments: Barrington Research analyst Gary Prestopino upgraded Global Payments (GPN) to outperform from market perform based on stronger-than-expected earnings for the third quarter of its fiscal year 2010, its new processing business in China starting this summer, and savings from moving to a new transaction platform.

After the market close on Mar. 31, the electronic transactions processing provider reported earnings of 60¢ a share, compared with a net loss of $1.33 a share a year ago, on an 11% jump in revenue, to $398.5 million. Income from continuing operations was up 35%, to 59¢ from 43¢ a share a year ago. Global Payments attributed the gains to steady growth in its U.S. ISO channel, continued success in its international businesses, and a better-than-expected effective tax rate, as well as a boost from foreign currency translations. The results beat the consensus estimate among analysts of 53¢ and Barrington's forecast of 47¢.

Global Payments is now processing seven of 11 Asian markets on the G2 platform and expects to add the U.S. to the platform by the end of September. The company plans to update investors on the cost savings from the G2 platform on its July 2010 earnings conference call. It has approval to process transactions in China and expects to be generating revenue there sometime this summer. It's the only U.S. acquirer approved to process international card transactions in China.

Management raised its revenue forecast for fiscal 2010 to a range of $1.615 billion to $1.625 billion—a 10% to 11% increase over fiscal 2009—from the $1.58 billion to $1.615 billion range. The company hiked its earnings estimate to $2.49 to $2.54 a share, from a range of $2.35 to $2.46. Barrington said it was raising its fiscal 2010 earnings forecast to $2.53, from $2.41, and its fiscal 2011 outlook to $2.87, from $2.72. Standard & Poor's maintained its strong buy recommendation and lifted the fiscal 2010 earnings estimate to $2.53, from $2.46. But S&P trimmed its target price by $2, to $58, on relative and intrinsic valuation measures.

Millicom: JPMorgan Chase (JPM) analyst Jean-Charles LeMardeley upgraded Millicom International Cellular (MICC) to overweight from neutral, saying he expects the company to beat consensus estimates significantly in 2010 and 2011, based on market growth driven by increased purchasing power by cellular customers as local currencies strengthen. Unfavorable seasonal results in Latin America could cause the company to miss analysts' earnings estimates for the first quarter of 2010, however, LeMardeley said in an Apr. 1 research note.

JPMorgan said Millicom shares deserves a premium valuation based on the company's superior positioning for growth among telecom providers in Central and Eastern Europe, the Middle East, and Africa due to solid market growth and positive trends in market share. JPMorgan also thinks the company has one of the best management teams in the industry, especially when it comes to marketing and distribution, which have been reflected in market-share gains in all of its markets. More active management of its balance sheet should drive better cash returns starting this year, with potential for big gains in future years, JPMorgan predicted. The bank also expects Millicom to announce more deals similar to one done in Ghana to sell towers to a third party, which would boost profits and the stock's valuation.

Millicom is the dominant cellular provider in Central America, its most important region. Central America contributed 47% of segment earnings before interest, taxes, depreciation, and amortization (Ebitda) last year, but its margins and market share in the region could shrink somewhat in the next few years, JPMorgan warned. The bank raised its target price for the end of 2010 to $110, from $91, based on long-term discounted cash flow and medium-term discounted terminal value analysis.