Analyst Picks and Pans

Analyst Picks and Pans: Capital One, AmEx, Discover, AMD


American Express (AXP) Capital One Financial (COF) Discover Financial Services (DFS)

Barclays Capital upgrades each to overweight from equal-weight

Shares of Capital One Financial Corp., Discover Financial Services and American Express Co. rose on Aug. 24 after Barclays Capital analyst Bruce Harting upgraded the companies, saying credit card issuers will see earnings steadily increase in the next three to five years.

Harting cited recent signs of stabilization in the rate of defaults. He expects the three companies to post positive earnings in 2010, more normalized earnings by second half of 2011, and historical above average earnings-per-share by 2012.

"We estimate that earnings leverage is significant just from a reduction in credit costs without making material increase in revenue growth," Harting wrote in a note to clients.

Nearly all credit card lenders have faced mounting losses amid the ongoing recession and rising unemployment. During recessions, losses on credit cards often closely mirror the unemployment rate. However, the worst should soon pass for the credit card industry, after several big credit card lenders last week reported better-than-forecast default rates for July, Harting said.

He added that he does still expect normal seasonal trends to push delinquencies higher in the second half of 2009, "but the increases should be more consistent with seasonal patterns," he wrote.

Harting raised his price target on shares of American Express by $10 to $38, on Capital One by $20 to $50 and on Discover Financial by $2 to $16.

Advanced Micro Devices (AMD)

Citigroup upgrades to buy from hold

Citigroup analyst Glen Yeung said on Aug. 24 that AMD's competitive position with its major customer is likely bottoming, and he sees its gross margin recovering. Yeung also thinks that analysts' 2010 consensus earnings estimates are likely conservative, as AMD often outperforms the current consensus growth rate in periods of improving PC growth. He noted that for the third quarter to date, AMD is off 4.4%, lagging broader chip industry.

Yeung recognizes that the company's competitive position is poor, and that its net debt position ranks it as "low quality." But with the stock trading at just 1.25 times enterprise value-to-sales, the risk/reward is favorable. He trimmed his $1.21 2010 loss per share estimate to a $1.19 loss, and raised his $4.25 price target to $5.50.

Radiant Systems (RSYS)

Wedbush Morgan upgrades to outperform from neutral

Wedbush Morgan analyst Gil B. Luria upgraded Radiant Systems on Aug. 24, citing the success of its payment processing product and an improved outlook in one of its key markets.

Checks of restaurants have shown quarter-over-quarter improvements and a stronger outlook for Radiant's restaurant technology market and potential benefits of its payment processing system, he said in a client note.

In addition, bundling its theft-deterrent product with its payment processing system has been a "runaway success" for Radiant, Luria said.

The company may even benefit as customers of Heartland Payment Systems seek alternative payment processing providers following a security breach at the card processing service provider, Luria said.

He increased his 2010 earnings-per-share estimate to 80 cents from 76 cents to reflect the success of the payments business. He maintained his 2009 estimate of 69 cents per share.

Luria increased his share price target to $13 from $10 to reflect higher estimates and reduced risk.

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