Analyst Picks & Pans

Stock Picks: Caterpillar, CSX


Caterpillar Inc. (CAT)

Morgan Stanley upgrades to overweight from underweight; raises price target

Morgan Stanley analyst Robert Wertheimer raised his investment rating on shares of Caterpillar Inc. on Feb. 9, saying he was positive on the world's largest maker of bulldozers for the first time in three years of covering the stock.

"We are now more bullish than [the Wall Street] consensus on both the pace of cyclical acceleration and on CAT's ability to deliver on its structural transformation and, potentially, $8-10 [per share] in earnings," the analyst wrote in a note. "Upside risk is material in 2-3 years if structural changes work, i.e. [the] shares could double".

The analyst said that Caterpillar's move to streamline parts and materials—which he said were verified in conversations with suppliers--could save the company "hundreds of millions to billions". He said he thinks many investors are still highly skeptical, specifically on the company's goal of $8-$10 earnings per share in 2012.

"We're not completely there yet either, but this feels like an area where too many are underestimating CAT," Wertheimer wrote.

The analyst raised his price target on the shares to $70 from $51.

CSX Corp. (CSX)

Stifel Nicolaus upgrades to buy from hold

Stifel Nicolaus analyst John Larkin raised his rating on CSX Corp. on Feb. 9, saying that the recent pullback in railroad share prices has created an attractive entry point for starting or adding to a position in CSX. Larkin noted that since Jan. 1, shares of the third-largest U.S. railroad have declined 12.3% vs. a 5.2% drop in the S&P 500 index.

The analyst maintained his EPS estimates of $3.10 for 2010, $3.65 for 2011, and $4.10 for 2012. He said he believes that his EPS estimates, as well as Wall Street consensus EPS estimates, may prove to be conservative, citing "the reasonable likelihood" of a gradual economic recovery over the coming three years, continuing pricing strength for carload freight, railroads' ability to offset much of their cost inflation via improved productivity, and the "relatively low" probability of unfavorable industry regulation.

The analyst has a 12-month price target of $51 on the shares.

Abercrombie & Fitch Co. (ANF)

Thomas Weisel Partners keeps hold; lowers estimates

Thomas Weisel analyst Liz Dunn lowered earnings estimates on teen apparel retailer Abercombie & Fitch Co. on Feb. 9 and maintained a hold rating on the shares. Dunn took the action ahead of the company's fourth-quarter earnings report scheduled for Feb. 16.

Dunn lowered her fourth-quarter EPS estimate from continuing operations to 81 cents from $1.00, below the Wall Street consensus forecast of 88 cents. She expected fourth-quarter overall sales to have declined 4.7% year-over-year to $951 million, with a 13% decrease in comparable-store sales.

"ANF utilized promotions to drive higher sales this quarter and thus we are modeling a 120 [basis point] decline in gross margin in 4Q," the analyst wrote. "While we expect markdowns to be higher than our initial expectations, we believe the company is beginning to improve sourcing and should benefit as the higher margin international business continues to grow. "

The analyst also reduced her fiscal 2009 EPS estimate to 84 cents from $1.03, and her fiscal 2011 estimate to $1.41 from $1.60

"While we are lowering numbers, we are incrementally more positive on ANF heading into the 4Q report given the recent improvement in [comparable-store sales], low near term expectations and the future focus on international growth," Dunn wrote.

Dunn has a 12-month price target of $35 on the shares.

Electronic Arts (ERTS)

Standard & Poor's Equity Research reiterates sell; changes estimates

Electronic Arts Inc., the world's second-largest video-game publisher, reported after the close of trading Feb. 8 that its third-quarter net loss narrowed to $82 million, or 25 cents a share, from a loss of $641 million, or $2 a share, a year earlier. Excluding some items, profit was 33 cents, compared with the 31-cent estimate of 23 analysts surveyed by Bloomberg. Sales fell 23 percent to $1.3 billion.

The company said fiscal 2011 profit (ending March), excluding some items, will be 50 cents a share to 70 cents a share.

S&P equity analyst Jim Yin reiterated his sell recommendation on Electronic Arts shares on Feb. 9, noting that the company's 25 cents loss was wider than his estimate of an 18 cents loss. Yin said in a note that despite the company's plans to release a slate of "top-rated" games, it expected non-GAAP revenues to fall in fiscal 2011 (Mar.) due to lower distribution revenues.

"We think its key franchises are losing their appeal," Yin wrote. He said that while Electronic Arts is shifting its focus to mobile and online games, it is still dependent on major releases of hit titles, which are becoming more costly to develop.

Yin narrowed his fiscal 2010 estimate by 12 cents to $2.13 loss per share, but widened his fiscal 2011 projection by 13 cents to a 58 cents loss. He kept his target price on the stock at $14.


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