Picks of the Week: Yahoo, FedEx, AOL, Citi

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Dec. 8

Citigroup Inc. (C)

Standard & Poor's Equity Research maintains hold

According to an unconfirmed Wall Street Journal report on Dec. 8, the U.S. government is requiring Citigroup Inc. to raise $20 billion to repay TARP capital. S&P equity analyst Stuart Plesser said in a Dec. 8 note that he thinks a capital raise would significantly dilute shareholders and that Citigroup will refrain from an issuance until after the government sells its stake in the company.

Separately, noted Plesser, the report stated that the government is requiring Wells Fargo (WFC) to raise "billions" of dollars to repay TARP. "We don't think WFC is in any rush to repay TARP as compensation restraints associated with TARP are likely not as big of an issue for WFC compared to C," wrote Plesser.

Research in Motion Ltd. (RIMM)

Kaufman Bros. reiterates buy

After the close of trading Dec. 7, Research in Motion Ltd. announced an enhanced strategic partnership with China Mobile where it will support TD-SCDMA (3G) and TD-LTE (4G) wireless technologies as well as market BlackBerry smart phones to the enterprise, small business, and consumer markets. Kaufman analyst Shaw Wu said in a Dec. 8 note that while it is unclear if the deal is exclusive or precludes other deals, "it at least gives [RIM] a first-mover advantage at the largest carrier in China with 508 million subscribers."

Wu left his estimates of $14.5 billion in revenue and $4.08 in earnings per share for fiscal 2010 (vs. the Wall Street consensus forecasts of $14.9 billion and $4.15) and $17.1 billion in revenue and $4.75 in EPS for fiscal 2011 (vs. $18.2 billion and $4.82).

Wu believes "the addition of China as a growth opportunity gives RIM a greater chance of delivering if not exceeding our estimates." He has a price target of $93 on the shares.

Dec. 7

Discover Financial Services (DFS)

Sterne Agee upgrades to buy from neutral

Sterne Agee analyst Henry Coffey upgraded Discover Financial Services on Dec. 7, saying loan-loss levels for the credit-card lender will be smaller than previously expected. Coffey also set a price target of $19 per share.

In a research note, Coffey said he expects Discover to report lower losses during the second half of fiscal 2010. Discover's fiscal year ends Nov. 30. Coffey projects Discover's rate of loans written off as not repayable will fall below the unemployment level for the most recent September through November period. Sterne Agee's earnings model predicts a loss rate of 9 percent, but monthly data from the period suggests a rate closer to 8.5 percent of total loans failing, Coffee wrote in the note.

With losses expected to start declining in the second half of 2010, Coffey said Discover should reach its projected earnings potential sometime in the next 18 to 24 months. Coffey projects Discover's earnings potential is $2.40 per share, up from a previous estimate of $2.10 per share.

Brocade Communications Systems Inc. (BRCD)

Oppenheimer upgrades to outperform from perform

Shares of Brocade Communications Systems Inc. edged higher in premarket trading Dec. 7 after Oppenheimer analyst Ittai Kidron upgraded the company, saying it could win market share as its rivals try to digest recent acquisitions. Kidron also set a price target of $8.50.

He said Brocade stands to benefit from the distraction from Hewlett Packard Co.'s purchase of 3Com and Avaya Inc.'s acquisition of Nortel's enterprise business. Kidron added that Brocade's contracts to sell IP/Ethernet products to IBM Corp. and Dell Inc. will help the business over a longer term.

Moreover, Brocade generates strong free cash flow from a "stable" business, and is trading below normal levels, the analyst said.

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