Analyst Picks & Pans March 17, 2010, 11:26AM EST

Stock Picks: Adobe, BlackRock, Discover, Greenhill

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Discover Financial Services: William Blair & Co. equity analyst David Long maintained an outperform rating on shares of Discover Financial Services (DFS) on Mar. 17.

The credit-card lender announced on Mar. 16 a net loss for the three months ended Feb. 28 of $103.5 million, or 22 cents a share, compared with a profit of $120.4 million, or 25 cents, in the same period a year earlier. The card issuer said March 11 that it expected to report a loss of 22 cents to 23 cents a share. It also said it will pay back $1.2 billion to the Troubled Asset Relief Program, making the lender the last of the six biggest U.S. credit-card issuers to return bailout money.

Discover received regulatory approval to redeem the $1.2 billion of preferred stock that it issued to the U.S. Treasury Department under the TARP Capital Purchase Program, the company said. Discover Bank will issue $350 million of subordinated debt during the second quarter, the company said.

In a note, Long said the loss in the most recent quarter included a $305 million (34 cents per share) addition to Discover's loan loss reserve to incorporate a new analytical process intended to enhance management's ability to estimate incurred losses on non-delinquent accounts. The analyst said Discover indicated that net charge-offs of bad debt may have peaked in its fiscal first quarter as it recorded charge-offs of 8.51% of average loans and guided second-quarter charge-offs to be in the 8.0% to 8.5% range; additionally, delinquencies of 5.05% declined from 5.31% in its fiscal fourth quarter.

"When we consider that delinquencies seasonally increase in the first quarter from the fourth quarter, the contraction leads us to believe that Discover's credit quality may be improving at a faster pace than we previously expected and that it will be able to begin materially releasing loan loss reserves by the third quarter," Long wrote.

In the wake of Discover's TARP repayment announcement, the analyst said he calculates that the company will remain "well capitalized"; its tangible common equity ratio at Feb. 28 was 8.1%.

Long reduced a fiscal 2010 (ending November) EPS estimate by 22 cents to 58 cents to incorporate the addition to reserves. He noted that "increasing the loan loss reserve in the first quarter increases the reserve release in future quarters as credit quality improves"; he raised his fiscal 2011 EPS estimate by 10 cents to $1.65.

"We expect the consensus 2011 EPS estimate to increase, driving attractive stock price appreciation, as we expect the company to continue to report improving consumer credit quality trends over the next several quarters," Long wrote.

Greenhill & Co. Inc.: Keefe, Bruyette & Woods equity analyst Lauren Smith raised an investmnet rating on shares of Greenhill & Co. Inc. (GHL) to outperform from market perform on Mar. 17.

Greenhill, the merger advisor founded by Robert Greenhill, said on Mar. 16 it will buy Australia's Caliburn Partnership Pty for as much as $181 million, adding a firm whose clients include Rio Tinto Group and Westpac Banking Corp. New York-based Greenhill agreed to buy the 11-year-old financial adviser with 1.1 million shares valued at $90.7 million. If Caliburn meets certain revenue targets in three and five years, Greenhill will pay out more stock worth $90.7 million, based on the latest closing price.

In a note, Smith said Greenhill's announcement that it was acquiring Caliburn was a "game changer" for the company. Smith said that with Greenhill's expanded geographic presence, she believes the deal will add to the company's earnings "immediately".

She raised her 2010 EPS estimate to $3.45 from $3.15 and her 2011 projection to $5.40 from $4.25.

The analyst also hiked her price target on the shares to $110 from $82.