3 Stock Picks: DFS, CCL, SJM

Discover Financial Services (DFS) shares rose over 5% during early trading as the credit-card processor and issuer announced better-than-expected fiscal second-quarter results despite grim consumer conditions.

The Chicago-area company reported earnings of 43 cents a share for the quarter ended May 31, a figure buoyed by proceeds from a legal settlement in an antitrust lawsuit with Visa (V) and MasterCard (MA). Credit-card sales volume dropped 4% as consumers cut back on purchases. But delinquencies over 30 days hit 5.08% on managed loans, a mild improvement from the previous quarter.

The company is scrambling to cut costs since it isn’t seeing much near-term improvement in the broader consumer spending environment. Chairman and CEO David Nelms said that high unemployment rates continue to have a significant impact on the company’s financial results. But, he added, "we continue to focus on reducing expenses and maintaining a strong capital position as we manage through these challenging times."

In a preview note, Suntrust Robinson Humphries analyst John Stilmar wrote Monday the news is less bad rather than truly good. For a company caught in the midst of a consumer spending meltdown and a massive recalibration of personal credit, that will have to do. "With fewer balances migrating into delinquency, and stable later-stage delinquencies, the delinquency performance remains modestly better than our expectations," he wrote Monday. One bright spot: Stilmar says Discover’s "roll rate," the pace at which 30-day delinquencies "roll" to become 60-day and then 90-day or greater delinquencies, showed a 7% improvement, the second-best in the industry.

Bottom Line: Sell
It’s tough to see any growth in this company as long as cardholders are paying with plastic less often.

Despite the recession, cash-strapped consumers trimming their vacation plans and the swine flu scare, Carnival (CCL), the cruise line firm, still managed to post better-than-expected second-quarter earnings. However, it added that the rest of the year remains uncertain. Shares rose over 8% Thursday morning.

The company earned 33 cents for the quarter ended May 31. That tally was down a third from its 49 cents a share profit a year ago, but better than the 28 cents a share analysts were expecting.

David Bernstein, Carnival’s chief financial officer, said on a Thursday conference call that reduced fuel consumption gave earnings a five cents a share boost. However, part of that fuel savings was due to the company sending fewer ships to Mexico during the swine flu epidemic. The scare cut revenue about 9.8%. "Given the uncertain times and the flu disruption, I think our operating companies did an excellent job beating our guidance," said Bernstein.

That doesn’t mean things will improve amidst the ongoing recession, particularly when currency fluctuation and fuel prices are considered. Carnival said it projects fiscal-year results of $2 to $2.10 a share, down from March guidance of $2.10 to $2.30 a share. For the third quarter, it now expects earnings of $1.15 to $1.19 a share. Street analysts were expecting $1.25 a share.

"As we look forward to the back half of 2009, all of which was essentially booked after the start of the financial crisis,” said Bernstein, “you can expect to see slightly larger yield declines as the back half of the year feels the full brunt of the recession and impact by the seasonal deployments in Alaska and Europe.”

Bottom Line: Hold
Patient investors may see an uptick if consumers start to opt for budget voyages next year.

Investors pushed up the shares of J.M. Smucker (SJM) over 8% on Thursday after the food manufacturer posted strong earnings as peanut butter and jelly sandwiches increased their presence on recessionary household menus.

The Orrville, Ohio, owner of the Smucker's, Jif, Crisco and Folgers brands reported earnings of 80 cents a share, up from 69 cents a year ago. The Street, on average, anticipated profits of 69 cents a share.

Chairman and co-CEO Tim Smucker said the profits from newly acquired Folgers accounted for about two-thirds of the outperformance. People are, in fact, having a second cup, usually in their own kitchens.

"While this magnitude of gain may be difficult to repeat, this quarter's result in coffee... provides evidence that our ownership of Folgers will provide significant opportunities," he said. "We believe that the continued shift to at-home consumption contributed to our strong performance and is a trend we are well prepared for and think will continue."

Bottom Line: Buy
These brands are strong with consumers and are run by a company that's skillfully brewed up a sound product mix.