Picks of the Week: Apple, eBay, Goldman, IBM, Netflix
Notable Wall Street analyst opinions on stocks in the news for the week of Apr. 19-Apr. 23:
Citigroup Inc.: Standard & Poor's equity analyst Matthew Albrecht kept a buy recommendation and $6 price target on shares of Citigroup Inc. (C) on Apr. 19.
Citigroup said on Apr. 19 that its first-quarter profit more than doubled as the global economic rebound trimmed costs for bad loans, trading revenue surpassed analysts’ estimates and the value of subprime mortgage bonds increased.
First-quarter net income of $4.43 billion followed a loss of $7.58 billion in the fourth quarter and a profit of $1.59 billion in the first three months of 2009, New York-based Citigroup said in a statement. Adjusted per-share earnings were 14 cents. Analysts in a Bloomberg survey estimated the company would break even.
In a posting on the S&P MarketScope service, Albrecht said Citigroup's earnings per share (EPS) of 15 cents, vs. a year-earlier loss per share of 18 cents, were well above his estimate of a one-cent loss per share. Albrecht noted that Citigroup's revenues were aided by an improved net interest margin, securities write-ups and trading gains, while costs and the effective tax rate were below his estimate.
"Delinquencies have stabilized or improved across most categories, suggesting further reductions in loss provisioning," the analyst wrote.
Albrecht raised EPS estimates for 2010 to 49 cents from breakeven results, and for 2011 to 50 cents from 17 cents.
Palm Inc.: Morgan Keegan equity analyst Tavis McCourt downgraded a rating on shares of Palm Inc. (PALM) to underperform from market perform on Apr. 19.
In a note, McCourt said that the downgrade came after the maker of the Treo filed a Form 8-K with the SEC on Apr. 16 saying that Michael Abbott, its senior vice-resident of software and services, has resigned effective Apr. 23. McCourt noted that Palm also said that five other executives, including chief financial officer Doug Jeffries, received a total of nearly 1.2 million restricted shares; and that two officers, including Jeffries, got $250,000 retention bonuses.
"[T]hese are not actions that inspire confidence about PALM's ability or willingness to sell out at a premium valuation" in the near term, McCourt said.
Goldman Sachs Group Inc.: Standard & Poor's equity analyst Matthew Albrecht kept a hold recommendation and $180 price target on shares of Goldman Sachs Group Inc. (GS) on Apr. 20.
Goldman, facing a fraud lawsuit from U.S. regulators, reported first-quarter earnings that surpassed analysts' estimates on Apr. 20 on record fixed-income trading revenue.
Net income at the most profitable investment bank in Wall Street history almost doubled to $3.46 billion, or $5.59 a share, from $1.81 billion, or $3.39, a year earlier, the company said in a statement. The average estimate of 23 analysts surveyed by Bloomberg was for $4.14 per share. Predictions ranged from $3.33 to $5.97.
In a posting on the S&P MarketScope service, Albrecht said Goldman's first-quarter earnings per share of $5.59 beat his $4.34 estimate. He noted that investment banking, asset management and securities fees declined sequentially, but "strong" trading, particularly in the fixed income, currency, and commodity (FICC) business, boosted revenues.
"Compensation accrued at just 43% of net revenues, well below our estimate, and we now expect similar accrual levels for the rest of 2010," Albrecht wrote.
The analyst raised a 2010 earnings per share (EPS) estimate for 2010 by 51 cents to $20.79, and established a 2011 estimate at $22.10. He said his $180 target price was 1.4 times projected book value, below Goldman's historical valuation "as litigation and regulatory risks remain".
International Business Machines Corp.: UBS Securities equity analyst Maynard Um maintained a neutral rating on shares of International Business Machines Corp. (IBM) on Apr. 20. He raised a price target on the shares to $142 from $138.
IBM, the world's largest computer-services provider, reported on Apr. 20 that total sales in the first quarter rose 5.3% to $22.9 billion. Adjusting for foreign-exchange fluctuations, or FX, revenue was little changed from a year earlier, IBM said. First-quarter net income rose to $2.6 billion, or $1.97 a share, from $2.3 billion, or $1.70, a year earlier, IBM said.
IBM also said signings of first-quarter service contracts fell, signaling that spending on larger technology projects may not pick up until the second half of the year. Services signings, which account for more than half of total revenue, dropped about 2% to $12.3 billion, the company said. New contracts for application-management, which help clients maintain and develop software, slid 23%.
The company said profit this year will be $11.20 a share, up from a previous forecast of at least $11 a share. Analysts predicted $11.13 on average, based on estimates compiled by Bloomberg.
In a note, Um said he was "still looking for signs of sustainable revenue reacceleration" at IBM. "We continue to believe improved revenue growth is key to multiple expansion as material margin upside by segment may be challenging," he wrote.
Given expectations for "modestly" better margin expansion, Um raised estimates for 2010 to $99.4 billion in revenues from $99.0 billion, and EPS to $11.23 from $11.06; for 2011, he hiked estimates for revenues to $102.7 billion from $102.3 billion, and EPS to $11.86 from $11.73.
Apple Inc.: Citgroup equity analyst Richard Gardner kept a buy rating on shares of Apple Inc. (AAPL) on Apr. 21. He raised a price target on the shares to $320 from $300.
On Apr. 20, Apple reported a 90% surge in second-quarter profit on demand for the iPhone and Macintosh personal computer. Net income in the second quarter, which ended March 27, rose to $3.07 billion, or $3.33 a share, from $1.62 billion, or $1.79, a year earlier. Sales gained 49 percent to $13.5 billion. That surpassed the expectations of analysts, who predicted profit of $2.46 a share on sales of $12 billion.
Sales this quarter will be as high as $13.4 billion, Apple said, topping the $13 billion anticipated by analysts. Apple said iPhone shipments doubled to 8.75 million. The company also sold 2.94 million Macs and 10.9 million iPods.
Gardner said in a note that he is "significantly" raising his earnings per share (EPS) EPS estimates on the company's "stunning" second-quarter results. He said the company's $3.33 EPS and $13.5 billion in revenue topped even the most bullish forecasts, driven by record iPhone sales.
The analyst said the fact that Apple delivered such significant upside before this year's product introductions and refreshes makes him "all the more confident" in his positive stance on the stock through year-end.
Gardner raised EPS estimates for fiscal 2010 (ending September) to $13.17 from $11.54, and for fiscal 2011 to $15.50 from $13.67.
Harley-Davidson Inc.: UBS Securities equity analyst Robin Farley kept a neutral rating on shares of Harley-Davidson Inc. (HOG) on Apr. 21. She raised a price target on the shares to $35.50 from $25.50.
Harley-Davidson Inc., the biggest U.S. motorcycle maker, announced first-quarter profit that beat analysts' estimates on Apr. 20. Income from continuing operations was $68.7 million, or 29 cents a share, the Milwaukee-based company said. Analysts expected earnings of 24 cents a share, based on 8 estimates compiled by Bloomberg.
In a note, Farley said that Harley-Davidson's first-quarter EPS from continuing operations of 29 cents compared with her estimate of 25 cents, though her estimate excluded around 10 cents of restructuring charges.
"However, we believe manufacturing mix pulled $0.12 of that upside from future quarters," she wrote. She said that production of the company's Sportster model was only 15.3% of the first-quarter product mix, vs. 22.5% one year earlier, because Sportster production was shut down during the 2009 fourth quarter, allowing dealers to clear out older model-year inventory. Farley said the Touring model was 42.1% of the first-quarter production mix, vs. 34.8% in the prior year.
Historically, Sportsters account for 20% to 24% of the annual product mix while Touring is closer to 26% to 35%, Farley said, noting that Sportster is the company's lowest-margin model.
EBay Inc.: Kaufman Bros. equity analyst Aaron Kessler maintained a hold rating and $31 price target on shares of EBay Inc. (EBAY) on Apr. 22.
EBay had its biggest drop in more than a year in Nasdaq trading on Apr. 22 after its profit forecast missed estimates.
On Apr. 21, the online auction company reported that first-quarter net income rose 11% to $397.7 million, or 30 cents a share, from $357.1 million, or 28 cents, a year earlier. Excluding some costs, profit was 42 cents a share. Analysts had projected 41 cents on average. Second-quarter profit will be 37 cents to 39 cents a share, excluding one-time items, the company said. Analysts in a Bloomberg survey had estimated 40 cents on average.
Revenue in the second quarter will be $2.15 billion to $2.2 billion, EBay said. Analysts had anticipated $2.21 billion.
Kessler said in a note that eBay reported an "in line" first quarter with strength in its Payments unit but softer-than-expected gross merchandise volume (GMV) at its Marketplace unit. He said eBay's total revenues were 1.6% above his estimate while earnings before interest, taxes, depreciation and amortization, or EBITDA, was 4.6% above his projection and pro forma EPS of 42 cents was slightly above his view of 40 cents.
Kessler said eBay remains optimistic that its fee changes in the U.S. will drive stronger U.S. growth in 2010, although management indicated that it is too early to tell.
"[W]e would like to see signs of stronger Marketplace growth," Kessler said.
Netflix Inc.: Janney Montgomery Scott equity analyst Tony Wible reiterated a sell recommendation and assigned a $47.50 fair value estimate on shares of Netflix Inc. (NFLX) on Apr. 22.
On Apr. 21, Netflix said first-quarter profit rose 44% as the movie subscription service signed up new customers and increased online offerings.
Net income advanced to $32.3 million, or 59 cents a share, from $22.4 million, or 37 cents, a year earlier, the Los Gatos, California-based company said in a statement. Sales rose 25% to $493.7 million, meeting the average estimate of 24 analysts surveyed by Bloomberg.
First-quarter profit topped analysts' predictions of 54 cents a share, the average of 28 estimates in a survey.
The company projects second-quarter earnings will rise to 62 cents to 73 cents a share on sales of as much as $525 million. Analysts surveyed by Bloomberg estimated profit of 72 cents on revenue of $516.4 million.
Earnings for the full year will be $2.41 to $2.63 a share on sales of as much as $2.16 million. Analysts expected profit of $2.65.
"[W]e believe NFLX remains overvalued based on street expectations that do not adequately discount: 1) potential changes in the competitive environment (Redbox and digital threats), 2) content cost inflation as studios exercise more control over supply, and 3) digital risks that will only multiply as NFLX pushes more subscribers towards digital content," wrote Wible in a note.
"We readily acknowledge that our SELL call has not worked," Wible wrote. "While our timing has been off, we still cannot ignore the threats facing NFLX from intensifying competition, cost inflation, and digital commoditization."
Amazon.com Inc.: Janney Montgomery Scott equity analyst Shawn Milne reiterated a buy rating on shares of Amazon.com Inc. (AMZN) on Apr. 23. He also raised a fair value on the shares to $175 from $160.
Amazon.com predicted second-quarter earnings that missed analysts' estimates on Apr. 22, signaling the Web retailer isn't benefiting from a rebounding economy as much as some investors had expected as competition intensifies. Amazon.com said operating income will be $220 million to $320 million. Analysts in a Bloomberg survey predicted $322.2 million on average.
Revenue this quarter will be $6.1 billion to $6.7 billion, Amazon.com said. Analysts had predicted $6.84 billion on average for the first quarter and $6.4 billion for the second quarter.
First-quarter net income rose to $299 million, or 66 cents a share, from $177 million, or 41 cents, a year earlier. Analysts in a Bloomberg survey estimated 61 cents on average. Sales increased to $7.13 billion.
In a note, Milne said he was maintaining a positive view on the E-commerce sector, with an improved growth outlook of 5% to 10% for 2010. He expects Amazon.com to continue to post market share gains despite increased competition, based on an improved pricing and shipping strategy and an expanded merchandise selection
Milne said he sees rapid growth in third-party sales on Amazon.com, "which fuels stronger unit growth and helps insulate margins". The analyst said he believes the company's increasing leverage over fixed costs is "driving margin upside".
Milne raised a 2010 non-GAAP earnings per share (EPS) estimate to $3.65 from $3.50.
Continental Airlines Inc.: Jesup & Lamont equity analyst Helane Becker reiterated a buy rating on shares of Continental Airlines Inc. (CAL) on Apr. 23, with a $26 price target.
Continental, the focus of merger talks with UAL Corp.'s United Airlines, reported a wider first-quarter loss than analysts projected on Apr. 22. Continental, the fourth-biggest U.S. carrier, had a loss excluding one-time costs of $136 million, or 98 cents a share, more than the average 86-cent loss from eight analyst estimates compiled by Bloomberg.
Higher jet-fuel prices raised total operating costs, and an easing of the recession prompted businesses to resume travel. Continental's revenue from each seat flown a mile, an indicator of demand and fares, rose 5.4 percent from a year earlier.
"Continental is well positioned in international markets, where the premium business class passenger is returning to the air, generating positive revenue gains for the airline," wrote Becker in a note.
Becker noted that weather-related flight cancelations cost the company about $15 million in the first quarter. Revenues in the quarter were up by 7.0% to $3.2 billion from $3.0 billion and costs were up by 6.7% to $3.2 billion from $3.0 billion.
For the second quarter, Becker estimates EPS of 82 cents, vs. a loss excluding extraordinary items of $1.36 in the prior year, as Continental's results last year were negatively affected by the H1N1 flu virus in May and June. This year, the negative impact of the Icelandic volcano is estimated to be $24 million, Becker said.
The analyst said Continental's balance sheet has a "large" cash position: At the end of the quarter, unrestricted cash and short term investments was $3.15 billion, or around $22 per share. She said balance sheet debt is about $6.2 billion, with net debt at about $3.0 billion. There is about $497 million of equity on the balance sheet, Becker said.
"Continental's management team has repeatedly indicated it would be a willing participant in industry consolidation if it made sense for its employees, its customers and its shareholders," she wrote.