3 Stock Picks: MGM, AVP, KFT

Shares of MGM Mirage (MGM) rose sharply after it sold off a casino and struck deals to insure a major project would get built even if the company goes bankrupt. However, its key markets remain in dismal shape.

The gaming and resort operator, whose major shareholder is billionaire Kirk Kerkorian, would have reported a quarterly loss if not for the sale of its Treasure Island casino. That deal put its first-quarter earnings at 38 cents a share, down from earnings of 40 cents a share a year ago. Analysts expected an average loss of seven cents a share.

Meanwhile, gambling in Las Vegas continues to deteriorate. CEO Jim Murren said on a Monday evening conference call that MGM's key market remained weak. "In the first quarter, it was clearly challenging for all Las Vegas operators,” he said.

In addition to the asset sale, last week MGM announced it had secured financing arrangements with its partner Dubai World and other lenders to assure that its marquee $8.5 billion CityCenter project would go forward regardless of whether the company reorganizes in bankruptcy. (There have been calls to file bankruptcy from major investors such as Carl Icahn and private-equity fund Oaktree Capital Management.)

As for actual performance, analyst Amit Kapoor at Gabelli & Co. said gaming revenue dropped 16% as table volumes slid 20% from last year. Room revenue dropped 31%, also from a Vegas slump.

Oppenheimer analyst David Katz wrote Tuesday he thinks the shares will trade on issues outside actual performance. "We believe the shares of MGM will continue trading on non-fundamental issues in the near term, rather than on the outlook for the remainder of 2009 and for 2010," he wrote. "Although we forecast weakening property performance in 2010 as a result of CityCenter cannibalization, we expect the prospects for property sales and further financial restructuring to drive the shares."

Bottom Line: Sell
Take profits off the table from today's short squeeze – a third of its shares are held short – and invest, rather than gamble, somewhere else.

Hard times and scant domestic spending added up to a tough quarter for Avon Products (AVP). Avon reported first-quarter earnings of 27 cents a share, down from 43 cents a year earlier. Analysts expected, on average, profit of 33 cents a share.

Sales stayed flat and profits missed Street estimates as the rising dollar impacted overseas sales, a key source of growth for the cosmetics company.

To turn the tide, the company is tinkering with its mix of beauty products. "In January and February beauty units in the under 5-dollar value segment were continuing to decline in our top 14 markets,” said CEO Andrea Jung. However, “in March as we really increased the flow, not only did we reverse this decline but these value units grew by double digits.”

A silver lining of the economic decline is that Avon is picking up more sales representatives. Jung said Avon's sales representative recruitment strategy, which often yields success in periods of high unemployment, led to a 13% boost in its sales force. "Research in the United States confirms we are attracting a high percentage of people who have lost their jobs in the current recession," she said on a Tuesday conference call.

However, BMO Capital Markets analyst Constance Maneaty wrote Tuesday that spending to recruit sales representatives rose 390 basis points, cutting hard into profits. "Avon Products spent more to recruit and support reps in their early selling days and the expense ratio increased, owing to lower sales," she wrote.

Bottom Line: Hold
Even the recession-driven boost for sales recruitment has shown its limits in a time of reduced spending.

Investors bought Kraft Foods (KFT) shares Tuesday after the company reported a 10% boost in earnings and said margins improved.

The Northfield, Ill.-headquartered food production conglomerate posted first-quarter earnings of 45 cents a share, an improvement from 39 cents a share a year ago. Wall Street analysts, on average, expected earnings of 40 cents a share. For the quarter, Kraft boosted gross margins to 34.7% from 32.9% in the year-ago quarter. It also affirmed its full-year earnings guidance of $1.88 a share, based on a reduced projection it made in February.

"Our business momentum remains strong despite a challenging consumer environment," Chairman and CEO Irene Rosenfeld said in a conference call.

In the recession, Kraft has been touting value as a major point of appeal to the consumer. In February, it gave a presentation to analysts highlighting that a Kraft grilled cheese sandwich and a bowl of tomato soup will run a diner $1.

"As consumers shift their eating habits to more at-home meals, they may be willing to increase their spending on food, assuming the quality supports the higher price tag," Morningstar analyst Erin Swanson wrote.

Bottom Line: Hold
If people stay in for dinner, Kraft will benefit.