Stock Picks: Amazon.com, Chipotle Mexican Grill, Southwest Airlines
Amazon.com Inc.: Kaufman Bros. equity analyst Mayuresh Masurekar reiterated a hold rating on shares of Amazon.com Inc. (AMZN) on Oct. 22. He raised a price target on the shares to $145 from $135.
On Oct. 21, Amazon, the largest online retailer, forecast fourth-quarter operating income that fell short of analysts' estimates, squeezed by spending on new warehouses and marketing for Zappos.com and the Kindle e-reader.
Operating income will be $360 million to $560 million, Seattle-based Amazon said in a statement. Sales will be $12 billion to $13.3 billion. Analysts surveyed by Bloomberg had forecast operating profit of $621.6 million and sales of $12.2 billion on average.
Chief Executive Officer Jeff Bezos is increasing spending on warehouses to handle a growing array of televisions, apparel, and auto parts. The company also stepped up its use of TV commercials to promote the Kindle and introduced a less expensive version of the device, eating into profitability. Operating expenses rose 40 percent to $7.29 billion last quarter.
Third-quarter net income rose 16 percent to $231 million, or 51 cents a share, from $199 million, or 45 cents a share, a year earlier. Sales climbed 39 percent to $7.56 billion, Amazon said. Analysts had projected profit of 48 cents and sales of $7.37 billion.
In a note, Masurekar said Amazon reported "a strong top-line quarter." He said the company experienced margin pressure in the third quarter, which he expects to continue. Masurekar raised a 2011 revenue estimate by 5 percent, but hiked his pro forma earnings-per-share (EPS) estimate by 1 percent.
The analyst said that while he continues to believe that Amazon has "excellent long-term growth prospects, the stock should trade sideways over the next 12 months" due to margin pressure from the build-out of order fulfillment facilities and marketing expenses.
Chipotle Mexican Grill Inc.: Janney Montgomery Scott equity analyst Mark Kalinowski maintained a buy rating on shares of Chipotle Mexican Grill Inc. (CMG) on Oct. 22. He raised a fair value estimate on the shares to $225 from $210.
On Oct. 21, Chipotle, the burrito chain spun off from McDonald's Corp. (MCD) in 2006, reported third-quarter adjusted earnings of $1.52 a share, topping analysts' average estimate of $1.31.
The company said it sees comparable-store sales up "in the high single digits" in 2010; for 2011, it expects growth "in the low single digits." It also reaffirmed its plan to open 120 to 130 restaurants this year, with an additional 135 to 145 units opening in 2011.
"We view the potential positives for the company and its stock as outweighing the risks," Kalinowski said in a note. Among the positive factors he sees: the quality of the Chipotle customer experience, including "higher-quality ingredients and speedy service"; a continuation of "enviable" comparable-store sales growth; and a continued growth rate in units in operation "above that of the vast majority of other publicly traded restaurant companies."
Kalinowski raised EPS estimates for 2010 to $5.40 from $5.15; and for 2011 to $6.45 from $6.12.
Southwest Airlines Co. Hudson Securities analyst Daniel McKenzie maintained a buy rating and $17 price target on shares of Southwest Airlines Co. (LUV) on Oct. 22.
On Oct. 21, Southwest posted third-quarter net income of $205 million, or 27 cents a share, after a year-earlier loss of $16 million, or 2 cents a share.
Southwest plans to boost capacity 8 percent in 2011's first quarter and 5 percent in the second, Chief Financial Officer Laura Wright said. The Dallas-based airline doesn't intend to increase its fleet next year and will achieve the gains by flying its Boeing Co. jets more, she said. Southwest is adding capacity to offset deep cuts in 2010's first half, and hasn't decided on a full-year change, Wright said.
Average fares at Southwest jumped 16 percent to $132.53.
"We'll continue to show revenue gains year-over-year in the fourth quarter," Southwest Chief Executive Officer Gary Kelly said in an interview. "We've got momentum built up for year-over-year improvement into the first quarter."
In a note, McKenzie said he was raising an EPS estimate for the fourth quarter to 18 cents from 16 cents. He said a 2011 EPS estimate of $1.10 factors in an addition of "roughly" 10 cents from the company's pending acquisition of discount carrier AirTran Holdings Inc. (AAI).
He said he believes Southwest's new revenue management system will drive growth to international and smaller markets.
"Southwest is positioned to benefit nicely from incremental industry restructuring which appears inevitable to us," McKenzie said.
The analyst said the shares will "likely trade sideways in the near-term, but with the stock trading at 12.4 [times] our 2011 EPS, we think there is more value to be had."
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