business

Stock Picks: DuPont, Hewlett-Packard, Southwest Airlines

Wall Street analysts offer buy, sell, or hold opinions on stocks in the news on Sept. 27

DuPont Co.: Credit Suisse equity analyst John McNulty maintained a neutral rating and $46 price target on shares of DuPont Co. (DD), the third-biggest U.S. chemical maker, on Sept. 27.

In a note, McNulty said that after a company conference call last week focused on DuPont's electronics and communications business, "we came away feeling upbeat about the growth outlook for the segment." He said DuPont expects sales in the business to exceed $2.5 billion in 2010 with operating margins of 16 percent to 18 percent, "which is two years ahead of" the company's schedule.

McNulty said strong growth in the photovoltaic segment, inventory restocking by customers, and a recovery in the consumer electronics, displays, and printing markets, will all contribute to the strong sales he expects this year. He said profit margins are also "coming in better than expected" as the strong revenue growth combined with cost reduction and efficiency improvement efforts result in improved operating leverage.

"[W]e believe the stock is fairly valued and already reflects the strong growth outlook across a number of DD's businesses," McNulty said.

Hewlett-Packard Co.: Kaufman Bros. equity analyst Shaw Wu reiterated a buy rating and $51 price target on shares of Hewlett-Packard Co. (HPQ) on Sept. 27.

Wu said in a note his industry sources indicate that the company started shifting its strategy in its services business, which accounts for 28 percent of revenue, "roughly two quarters ago." He said that in his understanding, instead of more layoffs, the company has opted to redeploy personnel and resources to expand its global sales coverage. "So in essence, part of its services business has become more like an extension of its sales and marketing as opposed to a classic services business involved in outsourcing, consulting, and systems integration," he said.

Wu said his sources also indicate that the company is adding more emphasis on market segments where it has less exposure, like U.S. and foreign governments, telecommunications and Internet service providers, and health care, where there are greater growth opportunities.

"We view HPQ as a fairly defensive play with its recurring profit streams, broad portfolio and geographic exposure and room for operating leverage," Wu said.

Southwest Airlines Co.: Standard & Poor's equity analyst Jim Corridore reiterated a buy rating on shares of Southwest Airlines Co. (LUV) on Sept. 27.

On Sept. 27, Southwest, the largest U.S. low-fare carrier, agreed to buy AirTran Holdings Inc. (AAI) for about $1.4 billion in cash and stock, giving it access to Atlanta, the world's busiest airport. In the past five years, the U.S. airline industry has seen nine acquisitions of publicly traded companies with an average premium of 34 percent, according to data compiled by Bloomberg. Southwest is paying 5.4 times AirTran's earnings before interest, tax, depreciation, and amortization, compared with the median multiple of 4.8.

Atlanta, AirTran's biggest hub, is the largest U.S. market that Dallas-based Southwest doesn't already serve. The purchase also fulfills Southwest's goal of adding flights to Mexico and the Caribbean, and expands its presence at New York's LaGuardia and Boston's Logan airports.

Under the agreement, each of AirTran's common shares will be exchanged for $3.75 in cash and 0.321 shares of Southwest common stock. Including AirTran debt and capitalized aircraft operating leases, the transaction has a total value of about $3.4 billion, the airlines said. The offer values Orlando-based AirTran at $7.69 a share, 69 percent more than its closing price on Sept. 24, Southwest said in a statement. The transaction price includes AirTran's convertible notes.

"We like the proposed transaction," Corridore wrote in a posting on the S&P MarketScope service, as "LUV and AAI have been encroaching on each others' territories and the deal would decrease destructive pricing" for the airline industry.

Corridore said he thinks the combined company would have a strong national route network, low costs, and a "healthy" balance sheet.

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