S&P Picks and Pans: Wal-Mart, Smucker, Petrobras

Analyst opinions on stocks making headlines in Thursday's market

From Standard & Poor's Equity Research

S&P REITERATES BUY OPINION ON SHARES OF WAL-MART STORES

WMT; $57.61

July-quarter EPS of 86 cents, vs. 75 cents, is 3 cents above our estimate. Gross margin expanded significantly more than we expected as improved inventory management led to reduced number of markdowns and fewer clearance sales, despite higher food-cost inflation and energy costs. However, we are keeping our fiscal 2009 (Jan.) EPS forecast of $3.48, since we believe Wal-Mart’s $3.43-$3.50 fiscal 2009 EPS guidance reflects poor demand visibility in an adverse economic environment. Our 12-month target price remains $64 on discounted cash-flow (DCF) and P/E analysis and our view of continued marketshare gains from low-price leadership. /J. Agnese

S&P REITERATES STRONG BUY OPINION ON SHARES OF J.M. SMUCKER

SJM; $53.98

Before certain special items, July-quarter EPS of 82 cents, vs. 72 cents one year earlier, is 5 cents above our estimate. Looking ahead, we expect price hikes to bolster full fiscal 2009 (Apr.) gross profit. We still have a generally favorable view of Smucker’s plan to pay a $5 per share special dividend and acquire the Folgers business from Procter & Gamble (PG) . We look for the transaction, pending approvals, to close in the fourth quarter. With favorable July-quarter EPS, we raise our 12-month target price for Smucker to $63 from $55, still a P/E discount to what we expect from other food stocks. Indicated dividend yield is 2.4%. /T. Graves, CFA

S&P REITERATES BUY RECOMMENDATION ON ADSS OF PETROLEO BRASILEIRO SA (PETROBRAS)

PBR; $51.80

Petrobras posts second-quarter operating earnings per ADS of US$1.26 vs. 78 cents on high oil and gas price realizations, beating our estimate by 13 cents. Oil and gas production rose 3.7% on field startups, in line with our forecast, and we look for about 5% growth for full 2008. On revised price and margin projections, we raise our 2008 estimate by 54 cents to $4.86, 2009’s by $1.26 to $6.01, 2010’s by $2.53 to $6.28. On narrowed relative valuations, blended into our DCF and NAV, we cut our target price by $10 to $76, at a premium-to-peers 7X ratio of expected enterprise value to our 2009 EBITDA estimate. /T. Vital

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF SALESFORCE.COM

CRM; $67.30

Ahead of July-quarter results, expected Aug. 20, we are reiterating our GAAP EPS estimate of 8 cents vs. 3 cents. We expect revenues to increase 47% to $259 million, driven by a 49% rise in subscription and support revenues, and we look for operating margins to widen to about 6%. We maintain our fiscal 2009 (Jan.) EPS projection of 34 cents but raise fiscal 2010’s by 2 cents to 67 cents, reflecting our outlook for a modestly lower effective tax rate. We raise our target price by $3 to $70, a 6.0X ratio of enterprise value to our fiscal 2010 sales forecast, within the historical range for CRM shares. /Z. Bokhari

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF ELIZABETH ARDEN

RDEN; $19.38

June-quarter operating EPS of 22 cents, vs. 34 cents, beats our estimate by 3 cents. Upside came from various restructuring/cost containment programs and interest expense. Revenues declined an in-line 3%, hurt by weakness in the important U.S. department store channel. Despite the company’s recent acquisition of the Liz Claiborne fragrance licenses, we are cautious about fiscal 2009 (June) EPS, and keep our estimate of $1.65, which is at the low end of the company’s guidance of $1.65-$1.85. However, on higher peer P/Es, we are raising our 12-month target price by $3 to $21. /L. Braverman, CFA

S&P MAINTAINS NEUTRAL OUTLOOK ON U.S. HOMEBUILDING SUB-INDUSTRY

With foreclosed homes at 17% of the 4.5 million homes for sale in June, we believe the current peak-to-trough average home price decline may be closer to 30% vs. the historical average in the low 20%’s. In our view, price is the last measure to decline in a housing downturn, while pace or the number of new units ordered and delivered begins to stabilize. We believe markets less exposed to the highest foreclosures, unlike NV, CA, FL, AZ, OH, GA and MI, will benefit sooner from a housing rebound. We are already seeing a sequential quarterly improvement in asset impairments from builders. /K. Leon, CPA