Stock Picks: Amazon.com, Goldman Sachs, IBM
Amazon.com: Janney Montgomery Scott equity analyst Shawn Milne maintained a buy rating and $175 fair value estimate on shares of Amazon.com (AMZN) on July 20.
On July 19, Amazon.com, the largest Internet retailer, said growth in sales of its Kindle digital reader accelerated every month in the second quarter and that it is selling more electronic books than hardcover versions.
The rate of Kindle sales also has tripled since the company cut the device's price to $189, from $259, Amazon.com Chief Executive Officer Jeff Bezos said in a statement.
"We've reached a tipping point with the new price of Kindle," Bezos said. "Amazon.com customers now purchase more Kindle books than hardcover books—astonishing when you consider that we've been selling hardcover books for 15 years, and Kindle books for 33 months."
The 27 percent price cut, announced last month, was aimed at helping Amazon stave off a threat from Apple's (AAPL) tablet-style iPad, which includes e-book reading features. Amazon.com hasn't disclosed Kindle sales since releasing the device in 2007, saying only that it has sold millions.
Amazon.com sold more than triple the number of Kindle books in the first half of the year as it did in the same period last year, the company said. More than 81 percent of its 630,000 electronic books are $9.99 or less.
"Certainly part of the equation [for e-book sales exceeding hardcover titles] could be falling hardcover sales," Milne said in a note.
The analyst said he expects Kindle unit sales of 3 million in 2010 and overall Kindle revenue of $1.7 billion, or 5 percent of total revenue, "which may be conservative, given Amazon's data".
"We … maintain our positive view on the eCommerce sector with an improved growth outlook of [5 percent to 10 percent] for 2010," Milne said. He said he expects Amazon.com's market share gains to continue despite increased competition, based on an improved pricing and shipping strategy and an expanded selection of merchandise. He said he believes "increasing leverage over fixed costs is driving margin upside" for Amazon.com.
Goldman Sachs Group: Standard & Poor's equity analyst Matthew Albrecht kept a hold rating and 162 price target on shares of Goldman Sachs Group (GS) on July 20.
On July 20, Goldman Sachs said second-quarter profit dropped 82 percent on a slide in trading revenue, missing analysts' estimates five days after settling U.S. regulators' fraud allegations.
Net income fell to $613 million, or 78¢ a share, from $3.44 billion, or $4.93, a year earlier, New York-based Goldman Sachs said in a statement. The average estimate of 21 analysts surveyed by Bloomberg was for earnings of $1.99 per share, with estimates ranging from 77¢ to $4.34. Some of the analysts didn't include costs of the settlement in their calculations.
In a posting on the S&P MarketScope service, Albrecht said Goldman Sachs' second-quarter earnings per share (EPS) missed his $2.19 estimate as "costs from the U.K. bonus tax and the firm's SEC settlement weigh on the bottom line". The analyst noted that "advisory revenues continue to improve and the backlog of deals has grown, but underwriting fees have dried up".
Albrecht said the firm's trading revenues were hurt by lower activity levels, and new financial regulation "will likely weigh on this business".
The analyst lowered EPS estimates for 2010 to $14.55, from $15.04, and for 2011 to $17.64, from $17.80. He said the price target of 162 represents 1.2 times his projection for book value per share, "a steep discount to the stock's historical valuation".
International Business Machines: Kaufman Bros. equity analyst Karl Keirstead reaffirmed a hold rating and $135 price target on shares of International Business Machines (IBM) on July 20.
On July 19, IBM, the world's biggest computer-services company, missed analysts' revenue estimates and reported a drop in services-contract signings.
Revenue last quarter rose 2 percent to $23.7 billion, IBM said. Analysts on average estimated $24.2 billion, according to a Bloomberg survey. Currency fluctuations reduced sales by $500 million, the company said. Net income for the quarter climbed 9.4 percent to $3.39 billion, or $2.61 a share, topping analysts' average estimate of $2.58 a share.
Services-contract signings also declined 12 percent to $12.3 billion, the Armonk (N.Y.)-based company said—the second-straight quarterly decline in contracts for services.
IBM boosted its full-year profit forecast to at least $11.25 a share, missing analysts' average estimate of $11.28. The company had previously projected profit of at least $11.20.
Keirstead said in a note that IBM's lower-than-expected revenues for the quarter were due entirely to currency swings; the constant currency revenue growth rate of 2 percent was in line with his estimate. "[I]n our judgment, many investors were hoping for a stronger acceleration [in revenues] and more convincing signs that corporate IT spending was improving, he said. "Instead, the growth rate inched up from zero last quarter, to just 2 percent, despite a much easier year-over-year comparison, growth outside of the BRIC countries was zero, and IBM's guidance for 'an improvement' in the services and hardware units and 'similar growth' in the software unit did not hint at a meaningful recovery".
The analyst said that any expansion in the company's price-to-earnings multiple could be limited by the weak recovery trajectory in the services and software segments, by softness in Europe, and by uncertainty about recovery in IBM's hardware unit as the new z-series mainframe is introduced late in the 2010 third quarter.