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Analyst Picks & Pans

Picks of the Week: Beazer, DIRECTV, Google, Home Depot, Monsanto

Notable Wall Street analyst opinions on stocks in the news for the week of May 17-May 21:

May 17

Monsanto Co.: UBS Securities analyst Don Carson kept a buy rating on shares of Monsanto Co. (MON), the world's biggest seed company, on May 17. He lowered a price target on the shares to $83 from $86.

In a note, Carson said he was reducing estimates to reflect "the prospect of no rebound" in prices for Monsanto's Roundup broad-spectrum herbicide. Carson said the barrier to price improvement "is due more to competition from multinationals" like Syngenta AG (SYNN) and Dow Chemical Co. (DOW) than to excess inventories of Chinese-produces generic versions of the herbicide.

Carson said he expects Monsanto's gross profit to remain in the $550 million range, reducing his EPS estimates for fiscal 2010 (ending August) to $3.00 from $3.10, for fiscal 2011 to $3.65 from $3.95, and for fiscal 2012 to $4.40 from $4.85.

Visa Inc.: SunTrust Robinson Humphrey equity analyst Andrew Jeffrey upgraded a rating on shares of Visa Inc. (V) to buy from neutral on May 17. He set a $96 price target on the shares.

On May 14, shares of MasterCard and Visa fell after the U.S. Senate approved an amendment that would empower the Federal Reserve to impose limits on debit-card fees collected by the biggest banks as part of the financial-overhaul bill. Merchants last year paid $19.7 billion in fees tied to debit transactions processed MasterCard and Visa, with more than half that amount paid to banks as interchange, according to the National Retail Federation.

The legislation could hurt revenue at MasterCard and Visa, which collect royalties from banks based on card-spending volumes.

In a note, Jeffrey said he believes "the long-term risk/reward in V shares is more compelling than at any time in last 12 months, growing regulatory risk notwithstanding". He noted that while some investors will question the company's valuation in light of the government's "apparently growing regulatory zeal", he contends that Visa's business model is "inherently intact".

The analyst said Visa's EPS growth rate of over 20% is sustainable because of a combination of global organic revenue expansion, operating leverage and share repurchases.

May 18

Beazer Homes USA Inc.: Citigroup equity analyst Josh Levin raised a rating on shares of Beazer Homes USA Inc. (BZH), the Atlanta-based homebuilder, to buy from hold on May 18. He has a $7 price target on the shares.

In a note, Josh Levin said the shares were down around 24% since May 3, vs. a nearly 14% decline for the company's peer group over the same period. Although the stock price has dropped sharply, Levin said the thinks the "fundamentals of [the] BZH story" have improved.

The analyst said he thinks a recent recapitalization of the company served to eliminate risk as Beazer now doesn't face any debt maturities until 2011 and 2013; remove an overhang associated with possible future equity issuance; and allow management to focus on improving Beazer's operations.

Levin said his analysis suggests that his $7 price target is "conservative".

Home Depot Inc.: Standard & Poor's equity analyst Michael Souers lowered a rating on shares of Home Depot Inc. (HD) to sell from hold on May 18. He raised a price target on the shares to $33 from $31.

On May 18, Home Depot Inc., the largest U.S. home-improvement retailer, raised its annual profit forecast after first-quarter profit exceeded analysts' estimates on demand for seasonal merchandise.

Excluding some items, earnings were 45 cents a share, Atlanta-based Home Depot said in a statement. Analysts projected 40 cents, the average of 24 estimates compiled by Bloomberg. Home Depot raised its forecast for full-year profit to $1.88 a share from $1.79. Analysts estimate $1.87 on average. Sales in stores open at least a year jumped 4.8 percent, as the number of transactions rose by 13 million to 323 million. In March, Home Depot started cutting prices of flowers, fertilizers and patio furniture in the U.S. to help meet its goal of increasing annual sales for the first time in five years.

The retailer said sales may rise about 3.5 percent this year, up from a Feb. 23 projection of about 2.5 percent.

Revenue advanced 4.3 percent to $16.9 billion in the first quarter. Net income increased to $725 million, or 43 cents a share, from $514 million, or 30 cents, a year earlier.

In a posting on the S&P MarketScope service, Souers said that Home Depot's earnings before one-time items of 45 cents was 8 cents above his estimate. He said he expects further margin gains in fiscal 2011 (ending January), driven by supply chain improvement and expense control; he increased his fiscal 2011 and 2012 operating earnings per share (EPS) estimates to $1.92 and $2.15 from $1.78 and $1.98, respectively.

"[F]ollowing strong recent gains and given our cautious view on the housing market, we find HD overvalued at over 18 times our fiscal 2011 EPS estimate, a significant premium to the S&P 500," Souers wrote.

May 19

Analog Devices Inc. Cowen & Co. equity analyst John Barton maintained an outperform rating on shares of Analog Devices Inc. (ADI) on May 19.

On May 18, the maker of chips used in cars, consumer electronics and phone networks reported reported per-share profit of 55 cents, more than the 50-cent average estimate of 19 analysts Bloomberg compiled.

In a note, Barton said that ADI's revenue, gross margin and GAAP earnings per share (EPS) were all above management's guidance. Barton said company management cited better-than-expected strength primarily in the automotive and industrial markets. He noted that the company said that it has experienced no significant demand changes from Europe; as a result, it provided third-quarter revenue guidance of $695 million to $715 million.

The analyst raised his $2.06 fiscal 2010 (ending October) EPS estimate to $2.23, and his $2.36 estimate for fiscal 2011 to $2.61.

Hormel Foods Corp.: Janney Montgomery Scott analyst Jonathan Feeney maintained a neutral rating and $36 fair value estiimate on shares of Hormel Foods Corp. (HRL) on May 19. Austin, Minnesota-based Hormel is the maker of Spam lunchmeat.

In a note, Feeney said that Hormel's second-quarter operating EPS of 67 cents "easily beat" his estimate of 59 cents and the Wall Street consensus estimate of 61 cents. He said results at Jennie-O Turkey Store drove the higher than expected results, contributing $13 million, or 6 cents per share. The largest company's largest segment, Refrigerated Foods, reported results that were about $3 million ahead of his expectations, Feeney said.

The analyst said Hormel's Grocery products unit missed his forecast on margin pressure and "disappointing volume against very difficult comparisons".

Feeney raising EPS estimates for fiscal 2010 (ending October) to $2.82 from $2.67 and for fiscal 2011 to $2.83 from $2.77.

"Given the market's historical tendency to regard HRL as more of a commodity company when commodity trouble inevitably comes, we see a $36 target (13x forward EPS) as fair," he wrote.

May 20

DIRECTV: UBS Securities equity analyst John Hodulik maintained a buy rating on shares of DIRECTV (DTV), the largest U.S. satellite-TV provider, on May 20. He raised a price target on the shares to $43 from $39.

In a note, Hodulik said he met with DIRECTV management following the company's release of first-quarter results. He said that while first-quarter U.S. net subscriber additions missed his expectations, revenue, margins and free cash flow "were better" as U.S. average revenue per user improved and net subscriber additions and average revenue per user in Latin America topped his forecasts.

Hodulik said he expect 2010 net subscriber additions of 398,000 and revenue growth of 7.1%, with strength in Latin America more than offsetting weakness in the U.S.

The analyst raised his earnings per share (EPS) estimates for 2010 to $2.44 from $2.24, and for 2011 to $3.40 from $3.11, reflecting stock repurchases of $4 billion in both 2010 and 2011.

PetSmart Inc.: Janney Montgomery Scott equity analyst David Strasser reiterated a neutral rating on shares of PetSmart Inc. (PETM) on May 20. He has a $30 fair value estimate on the shares.

On May 19, the pet-store chain said it had first-quarter earnings of 46 cents a share. The average estimate of analysts surveyed by Bloomberg was for profit of 43 cents a share. PetSmart forecast second-quarter profit excluding some items of 33 cents to 37 cents a share, compared with the analyst estimate of 36 cents.

In a note, Strasser said the company posted a "solid" quarter, with same-store sales up 2.8% and gross margin up 56 basis points, "both better than our model".

"When we downgraded the stock on March 23 2010, after a 50% move in about 6 months, we had no qualms about PETM's strategy or its fundamental story," the analyst wrote. "We simply believe the rate of improvement is captured in [the stock's] current valuation".

May 21

Dell Inc.: Kaufman Bros. equity analyst Shaw Wu maintained a hold rating on shares of Dell Inc. (DELL) on May 21. He raised a price target on the shares to $14 from $13.

On May 20, Dell, the world's third-largest personal-computer maker, reported first-quarter gross margins that missed some analysts' estimates after rising component costs eroded the benefit of a rebound in corporate demand.

Gross margin, excluding some items, was 17.6 percent, Dell said in a statement.

The higher costs of some components, such as memory chips, cut into profitability for the second-straight quarter even as Dell won new buyers for PCs, which account for more than half of revenue. Dell is working to lessen its dependence on PCs by expanding into services, adding smartphones and readying a tablet to take on Apple Inc. (AAPL) and Hewlett-Packard Co. (HPQ).

"The gross margin is somewhat concerning," said Wu in a May 20 interview on Bloomberg TV.

Dell reported that first-quarter sales rose 21 percent to $14.9 billion. Net income rose 52 percent to $441 million, or 22 cents a share, from $290 million, or 15 cents, a year earlier. Profit, minus some costs, was 30 cents a share. Analysts on average projected profit of 27 cents on sales of $14.2 billion.

In a May 21 note, Wu said that Dell had a "nice quarter," but the company's gross margin and quality of earnings were "disappointing". Wu said that Dell's gross margin of 17.6% was below expectations of 17.9%; "it looks like DELL got hit harder on rising component costs" than Apple and Hewlett-Packard. Dell "has a much less diverse business model and thus much less room to maneuver," Wu said.

"In addition, the quality of earnings continues to be poor where there is a 27% difference between GAAP and non-GAAP EPS compared to 39% and 26% over the previous two quarters," Wu wrote.

The analyst raised fiscal 2011 estimates for revenue to $61.5 billion from $58.5 billion, and for earnings per share (EPS) to $1.20 from $1.15. "[W]e are assuming higher revenue offset by a lower gross margin thus our EPS raise is more muted," he wrote.

Google Inc.: Standard & Poor's equity analyst Scott Kessler reiterated a strong buy rating on shares of Google Inc. (GOOG) on May 21.

On May 20, Google introduced software that puts Web content on television to persuade more consumers to use the Internet in their living rooms and view advertisements that generate revenue.

The new tool, Google TV, will work with Intel Corp. (INTC) chips in products by Sony Corp. (SNE) and Logitech International SA, Google said at a conference in San Francisco.

In a posting on the S&P MarketScope service, Kessler noted that Google TV will include the company's Chrome browser and employ its search technology to enable users to more easily find shows and videos they are looking for.

"While numerous efforts at 'Internet TV' have failed over the years, we think there is considerable potential for Google TV, given advanced open platform and broadband technologies," Kessler wrote.

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