Analyst Picks & Pans

Stock Picks: Boston Scientific, Google, Home Depot, Lowe's


Boston Scientific: Morgan Joseph equity analyst Bruce Jackson reiterated a hold rating on shares of Boston Scientific (BSX) on June 24.

On June 23, the health-care equipment maker got $3 billion in loans to refinance existing bank debt maturing in 2011. The company will use a $1 billion term loan due 2013 and a $2 billion revolving credit line maturing the same year as part of the transaction, Boston Scientific said in a statement. Boston Scientific is based in Natick, Mass.

Proceeds will be used to replace an existing $1.75 billion credit line and repay a $900 million term loan provided by pharmaceutical maker Abbott Laboratories (ABT), according to the statement. Both of the existing loans are due next April. Abbott Labs, which is in Abbott Park, Ill., funded the five-year debt as part of its acquisition of Guidant's vascular unit from Boston Scientific.

In a note, Jackson said the new agreement includes a $1 billion term loan at Libor plus 2.75 percent and a $2 billion revolving credit line at Libor plus 2.25 percent, both due in June 2013.

"The new credit agreement has more favorable terms compared to the debt it is replacing, and the revolver provides financing flexibility for potential acquisitions," Jackson wrote. "We believe that the new credit agreement is potentially accretive to our 2011 EPS estimates."

The refinancing removes "one perceived overhang" to the stock, Jackson said, but the company still needs to recover lost business in its implantable cardiac defibrillator segment following a product recall earlier this year. He said Boston Scientific needs to launch the Promus Element coronary stent successfully. The launch is expected in the U.S. in mid-2012.

CarMax: UBS Securities analyst William Truelove raised a rating on shares of CarMax (KMX) to buy from neutral on June 24. He has a $28 price target on the shares.

On June 23, CarMax, the largest U.S. seller of used cars, rose the most in nine months after first-quarter profit topped analysts' estimates.

Profit in the period ended May 31 more than tripled from a year earlier, to $101.1 million, or 44¢ a share, Richmond, Virginia-based CarMax said in a statement. The average estimate of 15 analysts surveyed by Bloomberg was 33¢. Same-store sales gained 9 percent amid a ""gradual" rebound in customer traffic, Chief Executive Thomas Folliard said in the statement.

CarMax was chosen to replace XTO Energy in the Standard & Poor's 500 Index, S&P said on its website on June 23.

In a note, Truelove said his revised earnings per share (EPS) estimates of $1.53 for fiscal 2011 (ending February), $1.68 for fiscal 2012, and $1.88 for fiscal 2013 represent an increase of nearly 25 percent. He said "about two-thirds" of the increase reflects higher-than-expected consumer auto financing income and a third reflects higher used vehicle pricing and selling, general, and administrative expense.

"We believe used vehicle sales are likely to continue their positive trend, as [the] seasonally adjusted annual rate of new vehicles is also likely to increase," Truelove wrote. He said the company's commitment to increase the number of stores "is a plus" for earnings growth. He said that used vehicle prices "remain very strong," but he believes they will level off.

Google: Standard & Poor's equity analyst Scott Kessler reiterated a strong buy rating on shares of Google (GOOG) on June 24.

On June 24, a judge ruled that Google's YouTube didn't violate Viacom copyrights when content, including clips from its MTV and Comedy Central cable television channels, were posted on the video-sharing website.

U.S. District Judge Louis Stanton in New York said YouTube wasn't liable for infringement. Viacom, controlled by Sumner Redstone, had sought at least $1 billion in damages, according to a revised complaint filed in April 2008. Stanton agreed with YouTube that it was protected by the safe-harbor provision of the federal Digital Millennium Copyright Act, which says a service provider isn't liable for infringement if it removes material from its site when notified by the copyright owner.

"We think many had forgotten about this case, but believe it is a significant victory for GOOG and YouTube, and an even more notable endorsement of the DMCA," wrote Kessler in a posting on the S&P MarketScope service. He said that while Vicaom has indicated it will appeal, "we do not expect the decision to be reversed."

Home Depot and Lowe's: Janney Montgomery Scott equity analyst David Strasser lowered ratings on shares of both Home Depot (HD) and Lowe's (LOW) to neutral from buy on June 24. He lowered fair value estimates on Home Depot to $30 from $37 and on Lowe's to $22 from $29.

"[W]e believe the housing market recovery remains elusive and slower than anticipated," Strasser wrote in a note. He said much of the recent first-quarter same-store sales increases for the home improvement retailers was driven by government stimulus programs and better weather, "which we believe will wear off, resulting in slower sales."

The analyst said a variety of macroeconomic indicators, including home prices, unemployment, and consumer credit, "all point in the same negative direction."

"We believe that HD, in particular, does have significant margin drivers to offset some of the sales slowdown, but we fear that a return to negative [same-store sales growth] is possible and would keep the stock range-bound regardless of modest earnings growth," Strasser said. He said he is concerned about Lowe's investment in inventory and labor "ahead of a recovery that we do not see likely in 2010." He lowered his fiscal 2011 (ending January) EPS estimate for Home Depot to $1.88 from $1.95 and for Lowe's to $1.37 from $1.43.


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