Markets & Finance

Stock Picks: Starbucks, Fannie Mae, Nvidia


Plus Wall Street analyst opinions on Blue Nile, W&T Offshore, Vanguard Natural Resources, and Continental Resources

Starbucks (SBUX)

Jefferies & Co. reaffirms hold; raises price target

Shares of Starbucks Corp. perked up in premarket trading Nov. 5 after the chain said its fourth-quarter profit climbed and it lifted its fiscal 2010 adjusted earnings guidance due to improving traffic in its stores. After the close of trading Nov. 5, the company said customers increased their spending and more people visited its coffee shops in the fourth quarter, although there were fewer locations to frequent. The chain's cost-cutting measures were credited with giving its earnings a boost, as the company spent the year slashing expenses, laying off workers and reinventing the food it sells.

Starbucks adjusted profit of 24 cents per share beat the 21-cents-per share estimate of analysts polled by Thomson Reuters. Analysts' estimates typically exclude one-time items. Starbucks also raised its adjusted profit outlook for next year. It now expects earnings per share excluding one-time items to climb between 15 percent and 20 percent. The company previously expected earnings per share to grow 13 percent to 18 percent.

Jefferies & Co.'s Jeff Farmer said in a Nov. 6 client note that the quarterly results also topped his earnings forecast of 22 cents per share. The analyst said Starbucks' cost-cutting efforts have been better than expected, as it finished 2009 with $580 million in cost savings compared with a prior forecast for savings of $400 million. Farmer increased his price target on the shares to $22 from $21.

Fannie Mae (FNM)

Standard & Poor's Equity Research maintains hold; widens loss forecast

S&P equity analyst Rafay Khalid said on Nov. 6 that the mortgage giant's third-quarter loss per share of $3.47, vs. a $12.97 loss per share one year earlier, was wider than his $3.24 loss estimate, reflecting higher-than-expected loss provisions. Khalid expects Fannie to continue to suffer losses through 2010, necessitating further investments by the U.S. Treasury. He sees Fannie "facing uncertainties regarding its role in the housing market."

Khalid widened his 2009 loss per share forecast by 76 cents to a $14.05 loss and his 2010 loss forecast by $5.44 to a $14.93 loss. However, he kept his 12-month target price of $1.50.

Nvidia (NVDA)

Canaccord Adams reiterates buy

Driven by strength across all its businesses, Nvidia Corp. posted better-than-expected results for its third quarter, sending shares higher in premarket trading Nov. 6. The graphics chip maker posted earnings and revenue above Wall Street's expectations after the close of trading Nov. 5, and forecast revenue above estimates for the current quarter as well.

Bobby Burleson, an analyst with Canaccord Adams, said while all of Nvidia's businesses were strong, its GPU business performed the best, with sales up 25% quarter-over-quarter to $464.5 million. The company's total sales were $903 million. A GPU is a graphics processing unit, used mainly to process 3-D graphics.

Burleson said Nvidia experienced some supply constraints during the quarter, as its customers saw stronger than anticipated demand for their products.

Blue Nile (NILE)

Deutsche Bank upgrades to hold from sell

Shares of online jewelry retailer Blue Nile rose in premarket trading Nov. 6, after third-quarter profit rose 10% and a Deutsche Bank analyst upgraded the stock, seeing bright prospects for market share and its international business. Still, the analyst raised his price target on the shares to a level below Thursday's closing price because he thinks the stock is too expensive.

After the close of trading Nov. 5, Blue Nile said profit rose to 17 cents per share, up from 15 cents in the year-ago quarter. International sales growth was strong, and the company gained market share, Blue Nile said.

Deutsche Bank analyst Herman Leung said Blue Nile is making strides in gaining market share, given that many jewelers have gone bankrupt during the recession. Specifically, Leung said the number of jewelry businesses that have gone out of business in 2009 so far this year has risen 60% from a year ago.

Leung also said that international results are improving, which could be a bright long-term growth opportunity. An additional benefit to international business is the declining dollar. "Diamonds are transacted in U.S. dollars, and with the dollar getting weaker, we believe there is a benefit for Blue Nile in the near-term," Leung wrote in a client note.

Leung hiked his price target by $20 to $50. That means he thinks shares have room to decline about 15% from the Nov. 5 close of $58.72. "We think a discount to its historical average is warranted as the business growth (about 20 percent) is slower than its historical average," he wrote.

W&T Offshore (WTI)

Vanguard Natural Resources (VNR)

Continental Resources (CLR)

Jefferies & Co. downgrades each to hold from buy

Oil and gas exploration and production companies face pressure as near-term catalysts are limited, natural gas prices are likely to remain relatively low and stock values remain high, Jefferies & Co. analyst Subash Chandra said Nov. 6 as he downgraded stocks of W&T Offshore, Vanguard Natural Resources, and Continental Resources.

Chandra said Houston-based W&T Offshore's opportunity to increase its production and reserves at current commodity prices and services costs appears light, and assigned a $12 price target. Excluding acquisitions, he expects a double digit decline in production and reserves in 2010, despite resuming a modest drilling program in 2010.

Given expectations that natural gas prices will remain under stress for some time, Chandra expects shares of Vanguard Natural Resources to face pressure. Chandra's price target for Vanguard fell to $18 from $18.50. Shares fell 3.2% to $17.52 in premarket trading Nov. 6.

Shares of Continental Resources are trading at a substantial premium, Chandra said as he downgraded the stock. "Growth rates will have to accelerate to justify the premium," Chandra said. Still, he raised his price target for the company to $44 from $43. Shares of Continental closed at $39.23 on Nov. 5.


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