MOST NOTEWORTHY: Lam Research, Deutsche Telekom and France Telecom were today's noteworthy upgrades:
Credit Suisse upgraded Lam Research (NASDAQ:LRCX) to Outperform from Neutral citing margin expansion and valuation. Lam was named the firm's top pick in SCE names for 2H08.
JP Morgan upgraded shares of Deutsche Telekom (NYSE:DT) to Overweight from Neutral as they expect a stronger second half of the year for the industry.
France Telecom (NYSE:FTE) was upgraded to Buy from Neutral at Merrill and to Buy from Hold at Societe Generale after the company walked away without bidding for Sweden's TeliaSonera.
It's been about a year since Discover Financial Services (NYSE: DFS) became a public company. Unfortunately, the stock performance has been miserable -- going from $31 to $13.57.
Yet, the company keeps making money. In the latest quarter, Discover posted net income of $234 million, or $0.48 per share, which compares to $209.2 million, or $0.44 per share in the same period a year ago. The company got a boost from its unloading of its Goldfish card division (a UK credit card company).
No doubt, Discover must deal with the slowing U.S. economy. But, the good news is that the company has been relatively conservative with its credit standards and has long-time customers (which helps provide more stability). However, there is still a rise in delinquencies and charge-offs. For example, overdue loans (for the past 30 days) has gone from 2.71% to 3.54% over the past year.
Now, Discover does have key asset advantage; that is, it operates its own processing network. This is certainly a solid business as people increasing use credit cards and other electronic payments. In fact, Discover recently purchased Diner's Club International, which also has its own processing network.
Unfortunately, Wall Street isn't interested. The belief is that -- as the economy remains sluggish -- there is likely to be a drag on the growth of Discover.
Boeing (NYSE:BA) was cut to "sell" from "neutral" at Goldman Sachs, according tothe AP.Briefing.com also reports that AT&T (NYSE:T) was raised to "outperform" at Bernstein
I love the long-term prospects of Visa (NYSE: V) and MasterCard (NYSE: MA), but I do have to concede that a pesky lawsuit by Discover (NYSE: DFS) is the one big fly in this story's soup. According to the following article, Discover wants both credit-card companies to pay $6 billion for perceived violations of antitrust regulations. Unfortunately, these damages could be tripled if Visa and MasterCard lose. One of the big problems here is that American Express (NYSE: AXP) already won a settlement of $2.1 billion from Visa late last year and the company established an escrow fund worth $3 billion for litigation payments.
I'll admit, this lawsuit does give me and my credit-card investment thesis a little case of the shivers. After all, tripling $6 billion to $18 billion means that a huge amount of money is in play here, and a successful outcome for Discover would hamper the stocks of the two big card entities. When you read through the litigation risks in Visa's SEC filings (out of MasterCard and Visa, the latter is my favorite since it is still relatively fresh off its IPO and MasterCard has already had a big run), they are pretty scary. And the fact that the $6 billion figure just came to light this week has probably soured the perception of some investors and analysts. Nevertheless, all the previous litigation talk didn't stop Visa's stock from taking off after its IPO earlier this year.
After the 3G iPhone was finally announced Monday, with a price tag and a business model that could take the funky phone to the masses, Apple Inc. (NASDAQ: AAPL) ended lower on some profit taking. But have no fear. Already this morning, Citigroup raised Apple's price target to $287 from $248 with a Buy rating, and Lehman raised it to $234 from $202, maintaining its Overweight rating. Despite the stock trading higher in European markets, it's still not showing signs of recovery in premarket trading in the US.
ThinkPanmure initiated Intel Corp. (NASDAQ: INTC) with a Buy, claiming it is gaining market share over rival Advanced Micro Devices (NYSE: AMD). The analyst also said Intel is gaining prominence in the server, desktop and notebook markets.
Hewlett-Packard Co. (NYSE: HPQ) updated its desktop and notebook computers. It introduced Tuesday in Berlin a new ultra-thin portable, the Voodoo Envy, to rival Apple's MacBook Air. H-P also added a new version of a touch-screen desktop PC and 16 notebooks for consumers and businesses.
For the past couple days, I was at the Card Forum & Expo in Miami. There was a lot of buzz about debit cards, alternative payments – such as BillMeLater.com and Revolution Money – as well as mobile applications.
But there was also lots of talk about the recent buyout deal -- Discover Financial Services (NYSE: DFS) agreed to purchase the Diners Club International network from Citigroup (NYSE: C). The price tag came to $165 million.
Actually, Diners Club is a pioneer, having created the first major platform for charge cards (back in 1950).
No doubt, it was mainly for the affluent, and in the world of credit cards, Diners looks more like a niche player. So why the interest from Discover?
Basically, it's a way to move more aggressively into global markets as cards from Diners are accepted in more than 185 countries.
According to Discover, the deal is expected to add $10 million to $15 million in annual pre-tax profits – which is certainly good news. So, in yesterday's trading, Discover's stock price was up 5.5% to $18.09.
Citigroup Inc. (NYSE: C) shares are rising after a few news items regarding the company. First, C named Mark Rufeh as chief administrative officer and head of productivity for the institutional clients group. Rufeh is known as a cost-cutter, and the company hopes he can restore efficiency and discipline. Discover (NYSE: DFS) also agreed to buy Diner's Club from Citi. Lastly, most banks are getting a boost from the news that Washington Mutual (NYSE: WM) may get as much as a $5 billion investment. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on C.
After hitting a one-year high of $55.55 in May, the stock hit a one-year low of $17.99 in March. C opened this morning at $24.85. So far today the stock has hit a low of $24.61 and a high of $25.19. As of 12:45, C is trading at $25.11, up $1.03 (4.2%). The chart for C looks neutral but improving, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a June bull-put credit spread below the $17.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just two and a half months as long as C is above $17.50 at June expiration. Citi would have to fall by more than 30% before we would start to lose money.
C hasn't been below $17.50 at all in the past year and has shown support around $21.50 recently. This trade could be risky if the US economy turns out not to have hit bottom yet, but even if that happens, this position could be protected by the support the stock might find around $20, where it found support twice in the past month.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in C or DFS. He does control a bullish hedged play on WM that could be doing better.
As seen with the Visa (NYSE: V) IPO this week, there's definitely interest in the credit card industry.
However, not all companies are benefiting. For example, take a look at Discover Financial Services (NYSE: DFS), which became a public company in June. Since then, the stock has gone from $32 to $15.20.
Well, this week Discover announced its fiscal Q1 results. With the weak economy, it's no surprise that the company is feeling the pain and earnings plunged 65% to $81.2 million, or $0.17 per share.
While a chunk of this came from the unloading of its UK division (called Goldfish), the good news is that the transaction should help free up capital and provide more focus. This will certainly be critical in dealing with the inevitable charge-offs and delinquencies. Keep in mind that Discover set aside $305.6 million for credit losses.
Yet, investors are still showing caution. In yesterday's trading, Discover's stock fell 12%.
Recently, I've been getting too many emails and comments on my blog asking what I think of the Visa (NYSE: V) IPO. Listen, every single long-term investor should be interested in it. Until today, it's been one of the few remaining marquee companies around unavailable to our stock-obsessed society and aside from litigation risk, the company's got everything going for it.
It's got strong sales and transaction growth and more importantly, like rival MasterCard (NYSE: MA), it's immune to the current credit crunch, passing off cardholder debts to the banks. So, when others are sweating potentially catastrophic events like The Bear Stearns Companies Inc. (NYSE: BSC) and the potential collapse of other brokers like Lehman Brothers Holdings (NYSE: LEH), scaring everyone half to death, these guys are sitting pretty. This is also the main reason why MasterCard's stock has handily outperformed rivals American Express (NYSE: AXP) and Discover Financial Services (NYSE: DFS), two companies -- and stocks -- that are certainly feeling that credit pain.
There'll be plenty of other articles dissecting the company, but I find that in rare situations like these, it's best to think in terms of the general picture. Not because it's the right way to invest, but because it's the way most people do. And those most people are the ones who can really influence the stock price here.
MOST NOTEWORTHY: Williams, Kilroy Realty and Dynavax Tech were today's noteworthy upgrades:
RBC upgraded shares of Williams (NYSE: WMB) to Outperform from Sector Perform to reflect their expectation for three years of double-digit production growth in the company's E&P business.
Kilroy Realty (NYSE: KRC) was upgraded to Outperform from Neutral as they believe the current valuation does not reflect the company's pure asset value.
Oppenheimer upgraded shares of Dynavax Tech (NASDAQ: DVAX) to Outperform from Perform as they expect positive phase III results for Heplisav around mid-2008, driving shares higher.
MOST NOTEWORTHY: Certain banks, VASCO Data Security and Bankrate were today's noteworthy downgrades:
UBS downgraded shares of Discover (NYSE: DFS) and Capital One (NYSE: COF) to Sell from Neutral and American Express (NYSE: AXP) to Sell from Buy, as they believe a U.S.-led recession will lead to increased credit losses.
Jefferies downgraded shares of VASCO Data Security (NASDAQ: VDSI) to Hold from Buy to reflect the company's exposure to the financial services market, as they believe 2008 will be a tough year for small companies selling into tightening IT budgets.
Merriman lowered its rating on Bankrate (NASDAQ: RATE) to Neutral from Buy on valuation, as they believe the stock is pricing in upside from strong website traffic seen in January driven by refinance activity and Fed rate cuts. Citigroup downgraded shares to Hold from Buy on valuation, as they find the risk/reward less compelling at current levels.
OTHER DOWNGRADES:
JP Morgan removed SanDisk (NASDAQ: SNDK) from its Top 3 Picks List.
Goldman downgraded CSK Auto (NYSE: CAO) to Neutral from Buy and removed Google (GOOG) from its Conviction Buy List.
Baird lowered Comerica (NYSE: CMA) to Neutral from Outperform.
MOST NOTEWORTHY: Genitope Corp, Discover Financial and Mine Safety Appliances were today's noteworthy downgrades:
Genitope Corp (NASDAQ: GTOP) was downgraded to Underperform from Sector Perform at RBC Capital following MyVax's failure to meet its Phase III trial endpoint.
Calyon downgraded shares of Discover Financial (NYSE: DFS) to Neutral from Buy citing the weak macro environment.
MOST NOTEWORTHY: Kindred Healthcare, Five Star Quality, Corporate Executive Board, Deckers Outdoor and Discover were today's noteworthy upgrades:
Jefferies upgraded shares of Kindred Healthcare Inc (NYSE: KND) to Buy from Hold on valuation as they believe the risk/reward is attractive given good near-term earnings visibility and reasonable prospects for legislation to remove a significant reimbursement overhang.
The firm also upgraded Five Star Quality Inc (AMEX: FVE) to Buy from Hold following a meeting with management, to reflect the company's improving occupancy and better cost controls.
Deutsche Bank upgraded shares of The Corporate Executive Board Company (NASDAQ: EXBD) to Buy from Hold as they believe the company is positioned for strong growth in 2008.
Nollenberger upgraded shares of Deckers Outdoor Corporation (NASDAQ: DECK) to Buy from Neutral, as they believe the UGG brand will continue to outperform expectations both domestically and internationally.
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Earnings preview for Ford
Apple shares rise on report Steve Jobs is free of cancer
Toyota whups GM in the first half of 2008
