Stock Picks: Disney, Microsoft, Salesforce.com

Wall Street analysts offer buy, sell, or hold opinions on stocks in the news on Aug. 11

By Businessweek.com and Bloomberg News Staff

Walt Disney: Wunderlich Securities equity analyst Matthew Harrigan maintained a hold rating and $36 price target on shares of Walt Disney (DIS) on Aug. 11.

On Aug. 10, Disney, the world's biggest media company, reported third-quarter sales and profit that beat analysts' estimates on gains at the ESPN sports channel and a rebound at the film studio led by Toy Story 3. Net income rose 40 percent, to $1.33 billion, or 67¢ a share, in the period ended July 3, from $954 million, or 51¢, a year earlier, Disney said in a statement. (Disney is headquartered in Burbank, Calif.) Profit beat the 59¢ average of 19 estimates. Sales gained 16 percent, to $10 billion, exceeding the $9.34 billion average of 16 analysts' estimates.

Operating profit at the media network division increased 43 percent, to $1.89 billion, on $4.73 billion in revenue. Within the division, cable properties contributed $1.68 billion in operating profit, buoyed by $344 million of previously deferred revenue at ESPN, advertising gains, and affiliate fees. Profit at Disney's theme parks dropped 8.4 percent, to $477 million, on sales that rose 2.9 percent, to $2.83 billion. Studio operating profit of $123 million compared with a loss of $12 million a year ago, while revenue gained 30 percent, to $1.64 billion.

In a note, Harrigan said ESPN and ABC benefited from the World Cup and a seven-game National Basketball Assn. final between the Los Angeles Lakers and Boston Celtics, which helped boost ESPN ad sales 31 percent. "ABC Entertainment needs to be revitalized by new head Paul Lee, with Lost gone and shows such as Desperate Housewives aging," he said.

The analyst noted that per capita spending at the company's parks and resorts was up 5 percent for the third quarter, but domestic attendance was down 3 percent. "Despite efforts to dampen promotional pricing and recent August price increases, any reversion to 20 percent margins is likely remote," he said.

Harrigan said Disney's studio entertainment results benefited from the global performance of Toy Story 3, Alice in Wonderland, and Iron Man 2.

He said the "bull case" for the share price remains $42, while the "bear case" is $28.

Microsoft: Standard & Poor's equity analyst Jim Yin lowered a rating on shares of Microsoft (MSFT), the world's biggest software maker, to hold from buy on Aug. 11. He lowered a target price on the shares to $31 from $35.

"We are concerned about a slowing global economy and think PC unit sales growth will moderate after rising over 20 percent in the first half of this year," Yin wrote in a posting on the S&P MarketScope service. He said inventories of some PC components. such as hard disk drives. have been rising, "indicating to us that some PC manufacturers have already seen weaker demand." Yin said slower economic growth will most likely delay a PC refresh cycle.

The analyst cut a fiscal 2011 (ending June) forecast for revenue growth for Windows operating systems to 8.3 percent from 17 percent, and for earnings per share (EPS) $to $2.24 from $2.34.

Salesforce.com: Janney Montgomery Scott equity analyst Sasa Zorovic reiterated a buy rating on shares of Salesforce.com (CRM) the world's largest seller of Internet-based customer-management software, on Aug. 11. He raised a fair value estimate on the shares to $112 from $107.

Zorovic said in a note that while he anticipates that information technology and software spending will grow less in the second half of 2010 than in the first half, and the outlook for economic recovery remains "choppy," he believes businesses' shift to software-as-a-service (SaaS) from on-premises software deployments is accelerating; "the functionality and business propositions [for Saas] are quite compelling," he noted. "Salesforce.com is a particular beneficiary" of the trend, he said, with a user survey conducted by Janney indicating further growth, "particularly in up-selling newer offerings into the existing customer base."

The analyst raised a fiscal 2011 (ending January) estimates for revenue to $1.629 billion from $1.628 billion, vs. management guidance of $1.545 billion to $1.555 billion. He projects fiscal 2011 EPS of $1.24, vs. company guidance of $1.13-$1.15. He raised fiscal 2012 forecasts for revenue to $2.022 billion from $2.016 billion and for EPS to $1.85 from $1.83.

Zorovic said the stock "deservedly" trades at a valuation premium to its peer group.

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