S&P Picks and Pans: Microsoft, Yahoo, Google, Alcoa, Rio Tinto

Analyst opinions on stocks making headlines in Friday's market

From Standard & Poor's Equity Research

UPDATE - S&P DOWNGRADES SHARES OF YAHOO INC. TO HOLD FROM BUY, ON VALUATION

YHOO; $27.64

Even though Yahoo is trading below the value of the acquisition offer made this morning by Microsoft of $31 or an implied value of roughly $29.50 in Microsoft stock, we believe the shares are now reasonably priced. We think Microsoft could eventually increase the value of its offer, especially if Yahoo continues to maintain its interest in remaining an independent company. But we do not see material upside from current levels. Moreover, we do not expect another major suitor to materialize. We are raising our target price to $31 from $24, based on the value of Microsoft's offer. /S. Kessler

S&P REITERATES STRONG BUY RECOMMENDATION ON SHARES OF MICROSOFT

MSFT; $32.60

Microsoft has made a proposal to Yahoo to acquire all outstanding shares for $31 each in a cash and stock deal valued at $44.6B. We view this acquisition positively because it would help MSFT compete more effectively against Google in search engine and online advertising. Although the merger presents integration challenges, Microsoft identifies $1 billion of synergies in areas of online advertising yield, capital expenditures, and research and development. Microsoft expects the deal to close in the second half of of 2008, subject to customary approvals, and to be dilutive to EPS. /J. Yin

S&P REITERATES HOLD OPINION ON SHARES OF GOOGLE INC.

GOOG; $516.88

With stock options, Google posts Q4 EPS of $3.79 vs. $3.38, above our $3.55 forecast. Google's operating expenses and tax rate were lower than we projected. Gross revenues rose 51%, matching our estimate. The shares are off 8% today, as year-over-year revenue growth continued to decelerate and traffic acquisition costs ticked higher. We also have concerns about decelerating growth in clicks. We are cutting our EPS estimates to $16.59 from $16.62 for 2008 and to $18.69 from $19.98 for 2009. Based on revised peer and intrinsic analyses, we are cutting our 12-month target price to $650 from $670. /S. Kessler

S&P MAINTAINS NEUTRAL STANCE ON SHARES OF BOND INSURERS

We expect the group to strengthen today amid unconfirmed media reports on CNBC and others that eight banks have formed a consortium to seek a rescue plan for the troubled bond insurers. Though we applaud these efforts, we note that "bailout" plans typically focus on protecting the interests of policyholders and creditors, not necessarily common equity holders. We advise investors to buy Assured Guaranty (AGO; $23.92) on its superior-to-peers financial strength, hold Ambac (ABK; $12.54) and Security Capital (SCA; $3.34); and sell MBIA (MBI; $15.63). /C. Seifert

S&P REITERATES STRONG BUY RECOMMENDATION ON SHARES OF MICROSOFT

MSFT; $32.60

Microsoft has made a proposal to Yahoo to acquire all outstanding shares for $31 each in a cash and stock deal valued at $44.6B. We view this acquisition positively because it would help MSFT compete more effectively against Google (GOOG) in search engine and online advertising. Although the merger presents integration challenges, Microsoft identifies $1B of synergies in areas of online advertising yield, capital expenditures, and research and development. Microsoft expects the deal to close in the second half of of 2008, subject to customary approvals, and to be dilutive to EPS. /J. Yin

S&P REITERATES BUY OPINION ON SHARES OF YAHOO INC.

YHOO; $19.