Analyst Picks & Pans

Stock Picks: Goodyear, Salesforce, Limited, GameStop


Goodyear Tire & Rubber Co.: KeyBanc Capital Markets analyst Saul Ludwig maintained a buy rating on shares of Goodyear Tire & Rubber Co. (GT), the biggest U.S. tiremaker, on Feb. 25.

In a note, Ludwig said that the company's fourth-quarter 2009 earnings per share (EPS) of 14 cents, reported on Feb. 18, topped his estimate of 4 cents. "In general, there were no major 4Q09 surprises, but rather than dissecting 4Q09 further, we believe what lies ahead is much more important," the analyst wrote.

Ludwig noted that on Feb. 24, the company promoted Richard J. Kramer to chief executive officer to replace Robert J. Keegan, who will remain as executive chairman. "Kramer is smart, has strong interpersonal skills, is strong in finance and has exceptional support from his team members at GT," Ludwig wrote. "We view this expected promotion of Mr. Kramer to CEO as a positive move for GT and its management team".

Important factors in the company's earnings for 2010 will be its ability to price its products to offset raw material cost increases in the second half of the year and its success in mitigating currency devaluation in Venezuela, Ludwig said. He said improving demand, low fill rates (i.e., shortages) and inventories at 10-year low levels "will pave the way for GT -- and its competitors -- to increase prices this spring". The analyst also noted favorable potential for several new, higher margin products.

Ludwig lowered his 2010 EPS estimate from $1.00 to $0.85. His first-quarter 2010 estimate remains a loss of 7 cents; he set an initial estimate for 2011 of $1.50 EPS.

"We remain positive in our view toward GT," Ludwig said. He maintained his $19 price target on the shares.

Salesforce.com Inc.: Standard & Poor's equity analyst Zaineb Bokhari maintained a sell recommendation on shares of Salesforce.com Inc. (CRM) on Feb. 25.

On Feb. 24, the largest seller of Internet-based customer-management software reported fourth- quarter profit that topped analysts' estimates as more companies switched to online applications.

Bokhari said in a posting on the S&P MarketScope service that the company's fourth-quarter EPS of 16 cents, vs. 11 cents one year earlier, was 2 cents over her estimate, on lower taxes. Sales of $354 million, up 7% from a year earlier, were $12 million above her view.

"We see CRM as [the] clear on-demand leader, but year-to-year growth (sales, bookings, deferreds) continues to slow," Bokhari said. She noted that the company will expand distribution of its offerings, "but contrary to our prior view, does not plan to use recently raised capital to fund much M&A".

The analyst cut her fiscal 2011 (ending January) EPS estimate by 26 cents to 60 cents on higher projected marketing and interest expense; she set a fiscal 2012 forecast at 71 cents. She lifted her 12-month price target by $2 to $68.

Limited Brands Inc.: Cowen & Co. analyst Laura Champine reiterated a neutral rating on shares of Limited Brands Inc. (LTD) on Feb. 25.

On Feb. 24, the owner of Victoria's Secret and Bath & Body Works chains reported fourth-quarter profit excluding some items of $1.01 a share. The average analyst estimate in a Bloomberg survey was 99 cents a share.

In a note, Champine said that Limited's fourth-quarter EPS was four cents ahead of her estimate, on previously announced same-store sales growth of 1% vs. a 10% decline one year earlier. She said Limited's gross margin of 40.8% was 90 basis points higher than her estimate.

"We believe that tighter inventory management limited the need for the massive markdowns seen in Q4 [of 2008] and boosted merchandise margins," Champine said. "[W]e would not expect to see any meaningful operating expense leverage in FY10".

Champine said Limited's management expects first-quarter operating EPS to be 5 cents to 10 cents on total company same-store sales growth of 2%; the company's guidance for fiscal 2010 stands at $1.40 to $1.60. Limited also revised its February same-store sales outlook from flat to a high single-digit to low-double-digit increase, which may imply "very strong" Valentine's Day sales this year, the analyst said.

Champine raised her first-quarter operating EPS estimate by 2 cents to 6 cents and expects operating EPS of $1.44 in fiscal 2010, 2 cents above the Wall Street consensus view. Her fiscal 2011 operating EPS estimate of $1.52 is 11 cents below the consensus view.

GameStop Inc.: Piper Jaffray analyst Anthony Gikas lowered his rating on shares of GameStop Inc. (GME) to neutral from overweight and cut his price target for the shares to $16 from $24 on Feb. 25.

In a note, Gikas said it is becoming more evident that interactive game sales are shifting from packaged goods to digital, with packaged goods game sales declining from around 85% of category sales to nearly 70% during the past two years. "We expect the shift to digital entertainment will continue as the current video game cycle plateaus and declines during the next three years," the analyst said. He expects industry-wide packaged goods game sales will peak during 2010, and GameStop will experience peak earnings during 2011.

"To be sure, GameStop's business is not going away anytime soon," the analyst wrote. Gikas expects GameStop will gain market share and grow its margins during 2010-2012, but will not offset sales declines related to the current hardware lifecycle and the shift to digital entertainment. He estimates EPS of $2.65 for fiscal 2010 and $2.80 for fiscal 2011.

"Although [GameStop's] valuation and cash flow characteristics look attractive, we find it difficult to recommend a business with little long-term earnings growth," Gikas said.


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