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Analyst Picks & Pans

Stock Picks: Berkshire Hathaway, Cisco Systems, Fluor

Berkshire Hathaway Inc.: Standard & Poor's equity analyst Catherine Seifert maintained a hold rating and $88 price target on Class B shares of Berkshire Hathaway Inc. (BRK/B), the holding company headed by billionaire investor Warren Buffett, on Nov. 8.

On Nov. 5, Berkshire Hathaway, holder of a derivatives portfolio worth more than $60 billion, said third-quarter profit declined 7.7 percent on losses tied to equity-linked contracts. Net income fell to $2.99 billion from $3.24 billion a year earlier, Omaha-based Berkshire said in a statement.

Berkshire posted a $146 million derivatives loss, compared with a gain of $1.73 billion in last year's third quarter. Buffett, 80, seeks to add to earnings from Berkshire's insurance, energy, and consumer-goods units by placing derivative bets on equity indexes and the solvency of borrowers. The equity-related contracts produced a $700 million loss and were driven down by a weaker U.S. dollar, Berkshire said.

Credit default swaps, derivatives in which Buffett bets on the solvency of borrowers, gained $519 million in the third quarter after posting a $1.44 billion profit a year earlier. The loss on equity-related contracts compared with a $220 million gain in the third quarter of 2009.

Book value, a measure of assets minus liabilities, rose in the quarter to $149.7 billion from $142.8 billion on June 30 as earnings and stock advances boosted capital.

Berkshire had $34.5 billion of cash as of Sept. 30, compared with $28 billion three months earlier. The stock portfolio was valued at $57.6 billion at the end of the third quarter, up from $54.7 billion on June 30.

In a posting on the S&P MarketScope service, Seifert said Berkshire reported third-quarter operating earnings per share (EPS) for the Class B stock that she calculated to be $1.13, below her $1.21 expectation, as gains from non-insurance units were offset by 42 percent lower insurance underwriting profits and 14 percent lower investment income. She said the company's net EPS for the Class B stock of $1.21 mainly reflected derivative losses.

Seifert lowered her 2010 operating EPS estimate to $4.55, and maintained a forecast of $5.00 operating EPS per Class B share in 2011.

Cisco Systems Inc.: Kaufman Bros. equity analyst Shaw Wu maintained a buy rating and $28 price target on shares of Cisco Systems Inc. (CSCO) on Nov. 8.

In a note, Wu said he believes Cisco, the largest maker of computer networking equipment, is on track to meet or exceed consensus estimates of $10.7 billion in revenue and 40 cents in EPS when it reports October-quarter results after the close of trading Nov. 10.

"Our sources indicate relative strength in networking helped by renewed infrastructure spending after years of [underspending] and the desire to lower power consumption," the analyst wrote.

"[W]e continue to believe there is arguably no better company to take advantage of and drive two important industry trends: convergence of networks and convergence of technologies," Wu said.

Fluor Corp.: Morgan Joseph equity analyst Richard Paget lowered a rating on shares of Fluor Corp. (FLR), the largest publicly traded U.S. construction company, to hold from buy on Nov. 8. He kept a $53 price target on the shares.

On Nov. 4, Fluor said it had a third-quarter loss of 30 cents a share after charges for a wind project and a legal ruling on revenue of $5.51 billion. Excluding charges, adjusted earnings were 92 cents a share.

Fluor forecast earnings in 2011 may be as much as $3.40 a share, higher than the $3.31 average estimate projected by analysts. The Irving (Tex.)-based company also boosted its buyback program by 7.2 million shares.

The company's backlog grew to $33 billion in the third quarter amid new project awards for infrastructure, mining, oil and gas, including an oil sands project in Canada. The increase marked the second straight quarter of expansion, Fluor said.

Fluor boosted its share repurchase program after markets closed Nov. 4 by 7.2 million shares to a total of 12 million shares, or 6.7 percent of outstanding stock as of Oct. 29.

In a note, Paget said Fluor booked an "impressive" $7.6 billion in new orders with strong awards in its energy and industrial businesses. "[T]he company's disciplined bid process and focus on large, complex, non-commodity-type work should help stabilize margins," he said.

"While we believe Fluor is amongst the best positioned global companies in the [engineering and construction] space for a recovery, we believe favorable expectations are already reflected in [the] current share price," Paget said.

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