Stock Picks: Netflix, Boeing

Plus Wall Street analyst opinions on Qualcomm, Gentex, and United Airlines' parent

By Bloomberg BusinessWeek

Netflix (NFLX)

FBR Capital Markets upgrades to outperform from market perform

Wedbush Capital Markets upgrades to neutral from underperform

After the close of trading Jan. 27, Netflix posted a 36% gain in fourth-quarter earnings on a 23.6% jump in revenue due to growing subscriptions and lower costs to attract new subscribers. Profits at the online movie rental service surged to $31.9 million, or 56¢ a share, vs. $22.7 million, or 38¢ a share, a year ago, and exceeded the consensus estimate among analysts by 11¢ a share.

The company said it ended 2009 with 12.27 million subscribers, 97% of which were paying customers. Netflix added a record 1.1 million customers during the fourth quarter. Its churn, or subscriber turnover, rate fell to 3.9% in the latest quarter, from 4.2% a year earlier and 4.4% in the third quarter. Subscriber acquisition costs—stock-based compensation for marketing staff—fell to $25.23 per gross subscriber addition in the fourth quarter, from $26.67 the year before.

Netflix raised its profit forecast for 2010 to $137 million, or $2.50 a share, from $125 million, or $2.28, and raised its yearend subscriber projection to 16.3 million from 15.5 million. The Los Gatos (Calif.) company expects to add 1.2 million to 1.5 million more customers by the end of March.

Jefferies upgraded the stock to buy from hold, pointing to "the growing popularity of [Netflix's] movie streaming service in the form of robust subscriber growth." Merriman Curhan Ford raised Netflix to buy from neutral on projected wider margins as online streaming overtakes DVD shipping. FBR Capital Markets hiked its rating to outperform and raised its price target to $71 from $48. Kaufman Bros. boosted its price target to $69 from $55.

The latest results prompted even bearish analysts such as Barton Crockett at Lazard Capital Markets to do an about-face. Just two weeks ago he downgraded the stock to sell on doubts the company could sustain its growth. On Jan. 28, Crockett restored his hold rating and said in a research note that management's "guidance for more churn drops prompts rating change."

Crockett raised his 2010 earnings forecast to $2.53 a share, from $2.06, and his estimate of 2010 subscriber growth to nearly four million from 2.5 million. "Online streaming subscription competition is likely heating up over time, but Netflix is playing in a largely open field at the moment," he said in his note.

Wedbush Capital Markets analyst Michael Pachter also reversed course, changing his rating to neutral from underperform and increasing his 12-month price target to $60 from $50. "We think that Netflix has masterfully managed studio expectations by offering a greater share of its overall profit," Pachter wrote. "We think that the recent Warner Bros. agreement (a 28-day window for new releases) reflects a likely trend," although in the long term the new release window may erode Netflix's market share in favor of Redbox, which buys new titles from retailers.

Boeing (BA)

Broadpoint Amtech raises rating to buy from neutral

After the market close Jan. 27, Boeing reported a fourth-quarter profit of $1.27 billion, or $1.75 a share, compared with $1.31 billion, or $1.84 a share a year ago, on a 42% revenue increase to $17.9 billion. The company attributed the results to solid performance across its core businesses and the absence of the labor strike and the charge on the 747 program that marred the fourth quarter of 2008.

Boeing's total backlog ended the year at $316 billion, down 1% in the fourth quarter due to declines in both commercial airplanes and defense, space & security backlogs during the period.

Broadpoint AmTech analyst Peter Arment upgraded the stock to buy from neutral based on greater confidence in Boeing's airliner delivery schedule for the next two years and a firm backlog position through 2011. "While 2010 will be a challenging year with much of 2011's forecasted success hinging on Boeing's ability to deliver the 787 and 747-8 programs on time by yearend, we have higher conviction with air traffic recovering and order deferrals decreasing that the airliner cycle trough is occurring at materially higher levels than the past," Arment wrote.

Earnings growth will remain muted, though, due to zero profit margins on the initial 787s. Broadpoint sees investors' focus turning to the company's cash flow as 787 milestones are achieved throughout 2010.

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