Analyst Picks & Pans

Stock Picks: Adobe, MF Global, Schlumberger, Walgreen


Adobe Systems Inc.: Standard & Poor's equity analyst Zaineb Bokhari maintained a strong buy recommendation on shares of Adobe Systems Inc. (ADBE) on Mar. 24.

Adobe, the world's biggest maker of graphic-design programs, jumped the most in 11 months in Nasdaq trading on Mar. 24 after saying it will introduce a new version of its most profitable software on Apr. 12. Adobe said on Mar. 23 that it will host an event next month to unveil Creative Suite 5, also called CS5, comprising design products including Photoshop, Dreamweaver and Illustrator. The suite will ship late this quarter, Adobe said.

The company also forecast sales that beat analysts' estimates. Second-quarter sales will be at least $875 million, Adobe said. Analysts projected $862.2 million, the average of estimates compiled by Bloomberg. Excluding some costs, profit this quarter will be 39 cents to 44 cents a share, Adobe said. Analysts estimated 41 cents on average.

First-quarter net income fell 19 percent to $127.2 million, or 24 cents a share, from $156.4 million, or 30 cents, a year earlier, partly because of costs related to its October purchase of Omniture Inc. Excluding some costs, profit in the period ended March 5 was 40 cents, topping analysts' 37-cent average estimate. Sales rose 9.2% to $858.7 million. Analysts estimated $826.4 million.

In a posting on the S&P MarketScope service, Bokhari said she sees the release of Creative Suite 5 (CS5) driving fiscal 2010 (ending November) and fiscal 2011 sales for Adobe. She added that while the health of the economy will impact the strength of the upgrade cycle, she thinks market conditions are more favorable for CS5 than for its predecessor, CS4.

The analyst said she sees higher stock compensation and interest costs ahead for Adobe, and cut her fiscal 2010 earnings per share (EPS) estimate by 7 cents to $1.40; she kept her fiscal 2011 EPS projection at $1.79.

Bokhari lifted a target price on the shares to $44 from $43.

MF Global Holdings Ltd.: Sandler O'Neill equity analyst Richard Repetto kept a buy rating on shares of MF Global Holdings Ltd. (MF) on Mar. 24.

On Mar. 23, MF Holdings, the futures and options broker, announced that former New Jersey Governor Jon Corzine has accepted offers to lead the company and become an operating partner of buyout firm J.C. Flowers & Co.

Corzine, 63, who ran Goldman Sachs Group Inc. from 1994 to 1999, becomes chairman and chief executive officer immediately, MF Global said. He takes over from Bernard Dan, 50, who is leaving for personal reasons and will stay until May 16 to aid in Corzine's transition, the company said. MF Global shares gained as much as 13% in after-market trading on Mar. 23.

Corzine said MF Global's plans to become a primary dealer in government securities are a major part of his strategy to increase revenue. He will be paid an initial salary of $1.5 million and a $1.5 million signing bonus, the company said in a Mar. 23 regulatory filing.

Repetto said in a note that Corzine has an "impressive" resume: 24 years at Goldman Sachs, including serving as CFO and Chairman; Senator from New Jersey from 2001 to 2006; and Governor of New Jersey from 2006 to 2010. "Perhaps most significantly for MF, he began his career at Goldman Sachs as a fixed income trader," he wrote. In recent quarters, MF has been expanding its fixed income offering, and the company has applied for status as a primary dealer to the New York Federal Reserve Bank, Repetto said.

"[W]e suspect the relationship between J.C. Flowers and Corzine (both prior Goldman Sachs executives) facilitated the quick appointment of Corzine as CEO," the analyst wrote. Repetto noted that J.C. Flowers & Co. holds $150 million of MF Global's Series A convertible preferred shares, and played a significant role in the restructuring of MF Global's balance sheet in mid-2008.

"A former senator could have a useful set of experience in uncertain regulatory times," Repetto said. "With OTC derivatives legislation pending before the Senate and a host of other potential U.S. and international regulatory changes possible, the appointment of Corzine could be timely."

Repetto said that MF Global disclosed that fiscal fourth quarter net revenue would be $235 million to $245 million, which at the midpoint is $30 million below his prior forecast of $270 million. He lowered his fourth-quarter EPS estimate to 2 cents from 5 cents. He also reduced EPS estimates for fiscal 2010 (ending March) to 9 cents from 12 cents, and for fiscal 2011 to 37 cents from 40 cents.

The analyst raised a price target on the shares to $8.00 from $7.50.

Schlumberger Ltd.: Credit Agricole equity analyst Mark S. Urness lowered a rating on shares of Schlumberger Ltd. (SLB), the world's largest oilfield-services provider, to outperform from buy on Mar. 24.

In a note, Urness said Schlumberger CEO Andrew Gould provided some cautionary comments on the first quarter 2010 and full-year 2010 earnings at a recent investor conference.

"The first quarter has been adversely impacted by severe winter weather in the Russia, Eastern Europe and North Sea regions," Urness wrote. He also said that administrative contract approval delays have impacted activity levels in North Africa, and that the company has also had lower testing product and multiclient library sales.

"While improvements appear inevitable, pricing is expected to remain soft and increased customer spending is more likely to have a favorable impact on 2011," the analyst wrote.

Urness lowered a first-quarter EPS estimate to 60 cents from 66 cents. He also reduced EPS estimates for 2010 to $2.75 from $2.90 and for 2011 to $3.50 from $3.80.

He reduced the price target on Schlumberger shares to $74 from $84.

Walgreen Co.: Barclays Capital equity analyst Meredith Adler maintained an equal-weight rating on shares of Walgreen Co. (WAG) on Mar. 24.

Walgreen, the largest U.S. drugstore chain, said on Mar. 23 that second-quarter profit increased 4.5% as it benefitted from revamped product offerings and increased sales of 90-day prescriptions. Net income for the three months ended Feb. 28 rose to $669 million, or 68 cents a share, from $640 million, or 65 cents, a year earlier, the company said. Sales rose 3.1% to $17 billion.

Adler said in a note that Walgreen's EPS for the quarter missed her estimate by 1 cent and the consensus view of Wall Street analysts by 3 cents. She said gross margin widened by 42 bisis points, less than her estimate for a 76 basis point expansion.

The analyst raised a third-quarter EPS estimate to 61 cents from 60 cents, while maintaining EPS estimates for fiscal 2010 (ending August) at $2.22 and fiscal 2011 at $2.55. Adler said EPS estimates include dilution of 7 cents in 2010 and 3 cents in 2011 related to the company's planned acquisition of the Duane Reade pharmacy chain, which is expected to close at the end of the fiscal 2010 third quarter.

"WAG continues to make progress on key initiatives even as its core business remains depressed by the economy, limiting sales and profit growth," the analyst wrote.

Adler maintained a $36 price target on the shares.


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