Stock Picks: Fannie Mae, Freddie Mac, Eaton, Estee Lauder

Plus analyst opinions on American Express and Sanderson Farms

Fannie Mae (FNM)

Freddie Mac (FRE)

Keefe, Bruyette & Woods downgrades to underperform from market perform; cuts price target

Keefe, Bruyette & Woods downgraded mortgage finance companies Fannie Mae and Freddie Mac on Oct. 19, saying their common and preferred shares would be "worthless" given the nearly $100 billion they will continue to owe the government, even if recapitalized.

In order for the government-sponsored enterprises, which buy up mortgages from banks, to survive, they need to be recapitalized, said analyst Bose George in a note to investors. He suggested doing so through equity investments from the banks originating Fannie- and Freddie-backed loans.

But he expects the government will continue to run the companies, and that 10 years from now, both will still owe the government more than the value of their common and preferred equity.

In addition to downgrading the shares of both companies, KBW also cut the price target on both stocks to zero from $1.

"Our change in ratings and price targets today is primarily being made to make them consistent with the outcome that we are expecting for the companies: that they become government-run organizations and their current shareholders will not get anything in the end," George added.

Eaton Corp. (ETN)

Wells Fargo maintains market perform

Wells Fargo analyst Andrew Casey said on Oct. 19 that Eaton generated significant EBIT margin improvement against continued difficult end markets. He noted that on Oct. 19 Eaton reported third-quarter operating earnings of $1.21 per shrae, which beat his estimate of $1.00 and the consensus view of Wall Street analysts of 92 cents; also, the company guided fourth-quarter earnings above the consensus view despite maintaining its end-market view of revenues down 21%-22% year-over-year.

Casey said trough earnings are likely behind Eaton as it continues to cut costs against stabilizing demand. Given this, he expects EPS growth of 25% in 2010 and 31% in 2011. Yet the present valuation keeps him from being more constructive with the stock. He has a $60-$63 target range.

Estee Lauder Cos. (EL)

RBC Capital Markets upgrades to sector perform from underperform

RBC Capital Markets analyst Jason Gere upgraded shares of Estee Lauder Cos. on Oct. 19 and said sales are improving, while the cosmetic company's restructuring program is delivering results faster than anticipated. Gere said the worst seems to finally be behind the company.

Last week, the company said it will post fiscal first-quarter earnings "significantly" higher than it previously anticipated as it rolls out new products and records growth in Asia. Rising customer traffic in its travel retail business is helping as well, the company said. In August, Estee Lauder forecast first-quarter earnings between 23 cents and 30 cents per share, excluding restructuring charges.

Gere said sales of skin care and makeup products are driving results, but demand for fragrances still remains weak. Overall, however, Gere said the company is heading in the right direction after cutting costs and doing away with underperforming brands.

"While we are not encouraging investors to buy the stock at current levels, even in the face of raised guidance, we are more encouraged by the potential for better earnings near and long-term," Gere wrote in a client note.

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