Stock Picks: ADM, DreamWorks, Kellogg, Verizon

Wall Street analyst opinions on stocks making headlines in Monday's market

Archer-Daniels-Midland Co.: Morgan Stanley equity analyst Vincent Andrews raised a rating on shares of Archer-Daniels-Midland Co. (ADM) to overweight from neutral on Mar. 29, with a price target of $33 on the shares.

In a note, Andrews said shares of the world's largest grain processor are "cheap" on both an absolute and relative basis, with limited downside. He noted that ADM shares are down 9% year-to-date, and have underperformed the S&P 500 index, up 5%; industry peers Bunge Ltd. (BG), up 0.9%, and Corn Products International Inc. (CPO), up 19%; and the broader food group, up 7.4%.

"ADM offers the most upside in our food coverage universe," Andrews said.

The analyst also siad the EPS and share price performance of Wilmar International Ltd., Singapore-based agribusiness company in which ADM has a 16% equity stake, should make ADM "even cheaper". He raised a fiscal 2011 EPS estimate on ADM to $2.87 from $2.80 to incorporate Morgan Stanley's estimates on Wilmar.

"We think that ethanol cannot get materially worse and that oilseeds results could surpass low expectations on increased emerging market demand," said Andrews. He said a potential EPA ruling this summer providing a partial waiver on restrictions of E15, the gasoline blend that contains 15% ethanol, "could be a positive catalyst" for ADM shares.

DreamWorks Animation SKG Inc.: Cowen & Co. equity analyst Doug Creutz reiterated an outperform rating on shares of DreamWorks Animation SKG Inc. the top film at U.S. and Canadian theaters (DWA) on Mar. 29.

"How to Train Your Dragon," DreamWorks Animation's 3-D adventure, displaced "Alice in Wonderland" as the top film at U.S. and Canadian theaters on the weekend of Mar. 26-28, posting $43.3 million in ticket sales. "How to Train Your Dragon," distributed for Dreamworks Animation by Viacom Inc.'s (VIA) Paramount Pictures, tells the story of a young Viking who unexpectedly becomes the owner of one of the mythical creatures.

"Our concerns about soft pre-release audience interest proved well-founded," said Creutz in a note, as the film registered a "disappointing" opening weekend at the U.S. box office. He said the film's international weekend take of $31 million looked "light" given the number of key territories in which it opened, including Germany, Italy, Spain, Australia, Mexico, and Brazil.

"Right now, our best guess is that 'Dragon' will earn about $160 million in domestic box office and $270 million in international box office, implying a $120 million total box office shortfall vs. our prerelease estimate," Creutz said.

The analyst said he would wait to see another week of box office results before officially changing his fiscal 2010 EPS estimate -- currently $2.51 -- on DreamWorks Animation. "[O]ur current best guess for fiscal 2010 EPS is roughly $2.05," he said.

Creutz said he expected the shares to open lower on Mar. 29. "[W]e think this will eventually lead to a buying opportunity, though we would wait for further clarity on the film's legs and performance in other key international markets," he said.

Kellogg Co.: BMO Capital Markets equity analyst Kenneth Zaslow lowered as rating on shares of Kellogg Co. (K) to market perform from outperform on Mar. 29, with a price target of $59.

In a note, Zaslow said the stock valuation of the largest U.S. breakfast-cereal maker may be limited by decelerating cereal sales growth and a return to "a more traditional earnings algorithm" -- more growth from margin expansion and cost savings, and less from sales growth.

"[O]ur long-term view of Kellogg's superior business model, ability to generate $1 billion-plus of cost savings over the next three years, and dependable EPS growth remains unchanged," Zaslow wrote. He maintained a 2010 EPS outlook of $3.57.

"While there may be modest upside to our full-year 2010 EPS estimates, based on the cost savings initiatives and the company's conservatism, we believe any modest outperformance is largely reflected in K's current stock price," Zaslow wrote.

Verizon Communications Inc.: J.P. Morgan equity analyst Mike McCormack reiterated a neutral rating on shares of Verizon Communications Inc. (VZ) on Mar. 29.

Verizon and Vodafone Group Plc (VOD) continue to hold informal talks on how to optimize returns from their U.S. mobile-phone partnership, two people familiar with the talks said on Mar. 29, according to a Bloomberg News report.

Options include combining the two phone companies, having one carrier sell its stake in Verizon Wireless to the other, or paying a dividend to investors, according to the people, who declined to be identified because the talks are ongoing. No decisions are imminent, the people said.

In a note, McCormack said that a Mar. 28 report in the UK-based Telegraph newspaper, suggested that the companies are exploring three different options: a merger of the two companies; resumption of a dividend from Verizon Wireless; and the sale of Verizon Wireless, either to each other or a third party.

"While speculation of talks between the two carriers surfaces on a regular basis, we believe things could be different this time," the analyst wrote. He said Vodafone has not received dividends for its share of Verizon Wireless's cash flow since 2005 as Verizon Communications has opted for the wireless unit to pay down debt incurred from multiple acquisitions. Intercompany debt to Verizon Communications is expected to be repaid by the third quarter of 2010, the analyst said, putting Vodafone in position to seek distributions.

"In addition, we believe Verizon may face the need to tap its share of the wireless cash flow as soon as 2011 in order to support its own dividend," McCormack said, noting that neither company has commented on the latest speculation regarding their Verizon Wireless partnership.

McCormack said that acquiring Vodafone's stake is "likely the most desirable outcome" for Verizon. "However, we cannot ignore the tax consequences for Vodafone in such a sale," he said.

If Verizon sold its 55% ownership of Verizon Wireless, the analyst said, the company would be divesting its fastest growing business, making the company a "cash rich, wireline-only provider banking on further broadband growth".

"We see a full merger as unlikely given technical, transactional, and regulatory complexity," McCormack said. A buyout of Vodafone's share by Verizon Communications would be "sizable", he said, estimating that a deal to purchase Vodafone's 45% ownership in Verizon Wireless would be valued at almost $75 billion.

"[W]e believe Verizon would have room to lever its balance sheet to complete a deal," McCormack said.