Stock Picks: Alaska Air, Dell, Hewlett-Packard

Wall Street analysts offer buy, sell, or hold opinions on stocks in the news on Aug. 20

By Businessweek.com and Bloomberg News Staff

Alaska Air Group: Soleil Securities maintained a buy rating on shares of Alaska Air Group (ALK) on Aug. 20. The price target was lowered to $63, from $70.

Equity analyst James Higgins said he was lowering earnings per share (EPS) estimates on the stock following a smaller than previously expected gain in July passenger revenue per available seat mile (PRSAM) in Alaska Air's July update, somewhat offset by "modestly lower" costs.

On July 19, the company said that PRASM rose 4.5 percent in July from a year earlier.

Higgins lowered EPS forecasts for 2010 to $6.25, from $6.90, and for 2011 to $6.85, from $7.75.

The analyst said the new $63 target price "still suggest[s] more than 20 percent upside in the stock … [w]e continue to view ALK shares as attractive."

Dell: Kaufman Bros. equity analyst Shaw Wu maintained a hold rating and $14 price target on shares of Dell (DELL) on Aug. 20.

On Aug. 19, Dell, the world's third-largest personal-computer maker, reported second-quarter net income and sales that exceeded analyst expectations, and it forecast third-quarter sales above analysts' estimates.

Second-quarter net income rose to $545 million, or 28¢ a share, from $472 million, or 24¢, a year earlier. Profit, minus some costs, was 32¢ a share, beating analyst's 30¢ estimate.

Sales gained 22 percent, to $15.5 billion, which also exceeded predictions.

Percentage growth for sales this quarter over last quarter will be in the low single digits, Dell said in a statement.

Demand from companies and governments outside of the U.S. helped drive sales at the company's commercial division, Chief Financial Officer Brian Gladden said in an interview. Rising costs of components squeezed profitability, he said. Under Chief Executive Michael Dell, the company is trying to reduce its dependence on PC sales and build up a business that supplies computer services to government and corporations.

In a note, Wu said Dell reported a "solid" July quarter, though EPS were helped by a lower-than-expected tax rate.

"The surprise was gross margin, which came in at 17.2 percent, below expectations of 17.7 percent due to higher component pricing," the analyst said.

Wu called Dell's third-quarter sales guidance "surprisingly strong" and more upbeat than recent commentary from Cisco Systems (CSCO), with Dell expressing confidence in a sustainable replacement cycle for corporate IT equipment.

Wu raised estimates for fiscal 2011 (ending January) to $62.7 billion in revenue and $1.29 in EPS, from $61.4 billion and $1.20. He introduced fiscal 2012 estimates of $66.6 billion in revenue and $1.40 in EPS.

"We remain concerned with [Dell's] quality of earnings and believe a sustainable turnaround could prove difficult," Wu wrote.

Hewlett-Packard: Standard & Poor's equity analysts Thomas Smith and Clyde Montevirgen maintained a buy rating on shares of Hewlett-Packard (HPQ) on Aug. 20. They lowered a price target on the shares to $42, from $48.

On Aug. 19, Hewlett-Packard, the biggest computer maker, reiterated fourth-quarter profit and sales forecasts as it searches for a successor to Mark Hurd, who left as chief executive this month.

Profit, excluding some costs, will be $1.25 to $1.27 a share in the period that ends in October, Hewlett-Packard said in a statement. Revenue will be $32.5 billion to $32.7 billion. Those figures match preliminary forecasts issued Aug. 6, the day the company announced Hurd's departure.

Full-year earnings will be $4.49 to $4.51 a share, the company said, reiterating what on Aug. 6 was the fourth time it raised forecasts for fiscal 2010. This year's sales will be $125.3 billion to $125.5 billion. Before Aug. 6, analysts had predicted profit of $4.50 and revenue of $125.1 billion.

Third-quarter net income rose 6.1 percent, to $1.77 billion, from $1.67 billion. Sales rose 11 percent, to $30.7 billion, Hewlett-Packard said, in keeping with its earlier announcement.

In a posting on the S&P MarketScope service, the analysts said Hewlett-Packard's third-quarter operating EPS of $1.08 met S&P's estimate, with sales growth driven by its server, PC, and printer businesses. They said the company's wider gross margin was balanced by higher-than-expected expenses.

The analysts reduced EPS estimates for fiscal 2010 (ending October) to $4.50 from $4.55 and for fiscal 2011 to $4.99 from $5.20, reflecting expectations of slower growth in its PC businesses and higher expenses.

"We think risks and slower growth are largely reflected in the relatively low [valuation] multiples for the stock," they said, and they view the shares as undervalued.

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