Analyst Picks & Pans

Stock Picks: AT&T, Delta Air Lines, St. Jude Medical


AT&T: Standard & Poor's equity analyst Todd Rosenbluth maintained a strong buy rating on shares of AT&T (T) on Oct. 21.

AT&&T, the second-largest U.S. mobile-phone carrier, posted third-quarter sales on Oct.21 that beat analysts' estimates after demand for Apple's (AAPL) iPhone helped it weather competition from rivals' Android devices.

Sales rose 2.8 percent, to $31.6 billion, AT&T said in a statement. Analysts projected $31.2 billion, the average of estimates compiled by Bloomberg. Earnings, excluding one-time items, were 55¢ a share, matching the average estimate.

AT&T, which is based in Dallas and is the exclusive U.S. carrier for the iPhone, activated a record 5.2 million of the devices in the quarter. The carrier is facing stiffer competition after Verizon Wireless introduced smartphones running Google's Android software and Sprint Nextel rolled out a network with faster data speeds.

AT&T, which gets more than 40 percent of its sales from its wireless unit, gained a net 2.6 million new customers, including 745,000 contract subscribers.

The carrier raised iPhone activations by 63 percent from a year earlier. About 24 percent of the activations were for new customers, compared with 40 percent a year earlier. Apple introduced the iPhone 4 in June and the iPad tablet computer in April, linking both devices to AT&T's network. AT&T's revenue from wireless subscribers on data plans grew about 31 percent, to $4.8 billion, AT&T said. The carrier earlier this year stopped offering unlimited data plans in favor of so-called tiered pricing, starting at half the price.

In a posting on the S&P MarketScope service, Rosenbluth said the company's third-quarter earnings per share (EPS) were below his 63¢ estimate. He said revenues were "stronger" than he expected, but operating margins were narrower. He said margins in the company's wireless business were pressured by smartphone customer acquisition costs "that should benefit future quarters."

Tosenbluth said that "[w]ith 70 percent of free cash flow used for dividends in 2010," he was looking for commentary from company officials on AT&T's earnings call on its future cash usage, noting that the stock has a 6 percent dividend yield.

Delta Air Lines: Soleil Securities maintained a buy rating on shares of Delta Air Lines (DAL) on Oct. 21. A price target on the shares was raised to $18 from $17.

On Oct. 20, Delta posted profit that beat analysts' estimates, buoyed by rising fares in what may be the airline industry's best quarter since 2007.

Delta's profit excluding some costs was $1.10 a share, topping the 94¢ average of 13 estimates compiled by Bloomberg.

Restraint in adding seats helped Atlanta-based Delta fill planes and boost prices after year-earlier losses.

Improving demand for business travel, which is typically booked at the last minute and is more profitable than leisure trips, is helping the industry. Delta said its yield, or the average fare for each mile flown, rose 16 percent.

Delta said third-quarter sales jumped 18 percent, to $8.95 billion, led by a recovery in travel to Asia and Europe. Including what Delta said were one-time costs, third-quarter net income was $363 million, or 43¢ a share, after a year-earlier loss of $161 million, or 19¢.

The one-time items were $360 million, mostly noncash, for extinguishment of debt; $153 million related to getting rid of more than 50 planes at its Comair regional unit; and $53 million in expenses from its 2008 acquisition of Northwest Airlines, Delta said in a statement.

Fourth-quarter seating capacity will increase 5 percent to 7 percent from a year earlier, Delta said, with more flying to be done by existing aircraft and some jets pulled from temporary storage. That eases what Delta has called "very significant and sharp" reductions during the recession.

In a note, equity analyst James Higgins said Delta's third-quarter results "suggest superior revenue momentums."

"The Pacific, driven by Japanese exposure, is leading the way for DAL," Higgins said.

The analyst raised EPS estimates for 2010 to $1.90 from $1.65 and for 2011 to $2.35 from $2.15.

"The cost and capacity outlook remains favorable for Delta," Higgins said. "[W]e are not convinced that 2011 results will be the peak for this cycle."

St. Jude Medical: Morgan Joseph equity analyst Bruce Jackson reiterated a buy rating and $52 price target on shares of St. Jude Medical (STJ) on Oct. 21.

On Oct. 20, St. Jude, the world's second-largest maker of heart-rhythm devices, posted third-quarter earnings that beat analysts' estimates. Adjusted earnings were 72¢ a share, above the 68¢ average of estimates compiled by Bloomberg.

Adjusted results exclude after-tax charges of 3¢ a share related to costs associated with the company's acquisition of LightLab Imaging and 4¢ a share of in-process research and development expenses, and include 2¢ a share related to the expected benefit from the federal research and development tax credit not yet extended for 2010.

Revenue was $1.24 billion, vs. analysts' estimate of $1.25 billion.

In a note, Jackson said St. Jude reported "solid" third-quarter results, with adjusted EPS above his estimate of 69¢ while revenue was below his estimate of $1.252 billion.

"St. Jude is a high-quality name in the group and deserves a premium valuation, in our opinion, because we believe it has better than average long-term growth prospects," the analyst said.


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