Analyst Picks & Pans November 20, 2009, 3:28PM EST

Picks of the Week: Intel, RIM, Wells Fargo

Wall Street analysts give their buy, sell, or hold views on various stocks in the news this week

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Nov. 20

Kaufman Bros. maintains hold

Shares of Dell Inc. fell Nov. 20 after it reported weaker-than-expected revenue and profit for the third quarter as the computer maker missed out on a fledgling rebound in technology spending.

After the close of trading Nov. 19, Dell reported a net income of $337 million, or 17 cents per share, compared with $727 million, or 37 cents a share, in the same period a year ago. Excluding one-time items, Dell posted earnings of 23 cents per share. Revenue fell 15% to $12.9 billion.

Kaufman Bros. analyst Shaw Wu said Dell's weak quarter was "surprising" and proves that its turnaround attempts weren't working. Acer overtook Dell as the world's second-largest computer maker in the last quarter. Dell said it would rather give up market share than deeply discount to defend its turf.

He noted that Dell's peers, including Apple Inc. (AAPL), Hewlett Packard Co. (HPQ), IBM Corp. (IBM) and others have reported strong results.

Wu also took issue with the quality of Dell's earnings per share because of the “sizable" gap between what the company reported that conforms to official accounting principles and its pro forma profit excluding certain one-time items. Companies issue pro forma earnings to separate out charges and gains that cloud its true operating performance. But it could be used too aggressively to dress up flagging profits.

“One has to wonder if Dell can classify restructuring expenses as one-time items when they keep recurring," Wu said in a Nov. 20 research note.

Gap Inc. (GPS)

BMO Capital Markets keeps market perform

Retailer Gap Inc. said on Nov. 20 that its sales are improving after a tough few years, and a big advertising push this holiday season could boost sales -- but analysts caution that a rebound may be bumpy given the rough retail environment.

Gap said quarterly earnings climbed 25% as a key sales measures at its Old Navy stores rose 10% -- the first gain in at least two years. Sales at Banana Republic also improved after a lackluster period. The results stoked hopes that Gap's turnaround is taking hold.

Gap has made a strong turnaround with its Old Navy chain, repositioning the discounter to cater to frugal moms and improving stores, and has an excellent balance sheet. But investors' expectations for improvements in market share are already reflected in Gap's share price, said BMO Capital Markets analyst John Morris.

Nov. 19

Intel (INTC)

Texas Instruments (TXN)

LSI Corp. (LSI)

Marvell Technology (MRVL)

Bank of America Merrill Lynch downgrades to neutral from buy

Microchip Technology (MCHP)

Maxim Integrated Products (MXIM)

National Semiconductor (NSM)

Power Integrations (POWI)

Bank of America Merrill Lynch downgrades to underperform from neutral

In downgrading eight chipmakers on Nov. 19, BofA Merrill analyst Sumit Dhanda said in a client note that his industry model suggests that following a period of rapid replenishment of inventory and normalization of semiconductor shipments to “true" consumption levels, inventories in the supply chain are approaching a level suggesting a modest overshoot vs. equilibrium levels.

While Dhanda sees limited risk to near-term earnings estimates for the chip stocks, he thinks the longer these conditions persist, the greater the risk of a correction in the supply chain.

NetApp Inc. (POWI)

Credit Suisse keeps neutral; raises estimates, price target

Credit Suisse analyst Bill Shope said on Nov. 19 that NetApp's $910 million in second-quarter revenue and non-GAAP earnings per share (EPS) of 37 cents beat his respective $878.2 million and 30 cents estimates. He said seasonal strength in the public sector, "surprising" strength in Europe, and a strong close in the commercial segment led to the upside for the provider of enterprise storage and data management software and hardware. Also, "sharp gross margin upside added a surprising leverage component" to NetApp's earnings upside.

For the third quarter, the analyst raised his revenue estimate to $948.7 from $920.2 million and his EPS forecast to 37 cents from 36 cents. For fiscal 2010, he hiked his revenue projection to $3.71 billion from $3.61 billion and his EPS view to $1.36 from $1.28.

Shope also raised his $25 price target on the stock to $27. He noted that NetApp expects gross margins to decline to more normal levels going forward.

Nov. 18

Research in Motion (RIMM)

BMO Capital Markets downgrades to market perform from outperform; cuts price target

BMO Capital Markets on Nov. 18 downgraded Research in Motion Ltd., saying the BlackBerry maker faces rising competition and a consumer shift toward cheaper phones. Analyst Tim Long also reduced his share price target to $64 from $100.

Long is concerned about RIM's reliance on Verizon Wireless, which he said accounts for about 30% of the company's revenue. He said RIM's new BlackBerry Storm 2 is an improvement over the previous model, but lacks some “compelling features that consumers are now looking for" and isn't getting the marketing push from Verizon that rival Motorola Corp. is for its new Droid phone.

Long added that carriers are “flocking" to lower-priced handsets, attracted by the fact that retailers can offer some for as low as $99 with a rebate. He said RIM stands a good chance of competing with cheaper devices, but the lower average sale price could hurt the company's profits.

He cut his earnings estimate for the company's full fiscal year.

Wells Fargo (WFC)

Standard & Poor's Equity Research maintains hold

S&P equity analysts Stuart Plesser and Erik Oja said in a Nov. 18 note that an unconfirmed Bloomberg report stated that the FINRA (successor to NASD), and Wells Fargo Investments LLC have agreed in principle to return approximately $1.3 billion to the firm's clients who have had their funds frozen in the auction rate securities market.

While the analysts called the proposed settlement “expensive", they view it as removing an uncertainty for Wells Fargo. The analysts kept S&P's target price of $33 on the stock, warranted, in their view, as they think 2010 will be the trough year in Wells Fargo's earnings cycle, and with bad-debt chargeoffs peaking in mid-2010.