S&P Picks and Pans: HP, Citi, 3Com, XM, Verizon, Whole Foods

Analyst opinions on stocks making headlines in Wednesday's market

From Standard & Poor's Equity Research

S&P REITERATES BUY OPINION ON SHARES OF HEWLETT-PACKARD

HPQ; $43.95

HP reports January-quarter non-GAAP EPS of 86 cents (80 cents under generally accepted accounting principles, or GAAP), vs. 65 cents (GAAP 55 cents) one year earlier, beating our estimate by 6 cents. Revenues rose 13%, but only 8% before currency effects. All segments grew revenue, with personal computers leading and printer hardware trailing. Margins widened. We see cost-saving programs substantially aiding results through fiscal 2009 (Oct.). We are raising our operating EPS estimates to $3.50 from $3.35 for fiscal 2008 (Oct), and to $3.90 from $3.75 for fiscal 2009. We are also increasing our 12-month target price to $57 from $54, based on our updated P/E analysis. /T. Smith, CFA

S&P REITERATES HOLD RECOMMENDATION ON SHARES OF CITIGROUP

C; $25.44

An unconfirmed report in the Wall Street Journal says Citi is selling or closing some of its retail branches in Europe, Asia and Latin America. We see this as consistent with statements made by CEO Vikram Pandit regarding the divestiture of non-core assets. We have anticipated the sale of Citi's troubled Japanese consumer finance business for some time and expect further divestitures in slower growth areas. Citi is also expected to scale back growth plans for its U.S. retail banking unit. While small in size, we believe the moves show a willingness to be more aggressive in refocusing Citi. /F. Braden, CFA

S&P MAINTAINS STRONG SELL OPINION ON SHARES OF XM SATELLITE RADIO

XMSR; $12.74

We believe that potentially imminent Justice Dept. ruling on the company's pending merger with Sirius (SIRI) remains a close call. However, based on fixed exchange ratio, we note that recently narrowed spread (vs. past year, while deal was pending) suggests slightly higher odds that the transaction could pass regulatory scrutiny, on chances that FCC's decision in this instance could mirror Justice's. Even so, we would not be overly surprised by potentially onerous, and even some unprecedented regulatory conditions, potentially casting doubts on realizable synergies, amid weakening fundamentals. /T. Amobi, CPA, CFA

S&P MAINTAINS HOLD OPINION ON SHARES OF 3COM

COMS; $3.15

3Com and Bain Capital withdraw a security review filing submitted to the Committee on Foreign Investment in the United States related to Bain's proposed $2.2 billion acquisition of 3Com. The deal has come under scrutiny on security concerns related to a minority interest in 3Com by Chinese-based Hauwei that would result from the transaction. We think concession would be needed for Committee approval, including possibly the spin-off of the network security business. We are lower our target price to $4 from $5.50 on revised sum-of-parts analysis reflecting a lower takeover premium. /A. Bensinger

S&P UPGRADES OPINION ON VERIZON COMMUNICATIONS SHARES TO BUY FROM HOLD

VZ; $35.34

Shares are down 19% so far in 2008, despite Verizon reporting what we see as solid fourth-quarter results that were not hurt by a slowing U.S. economy. In our view, Verizon continues to take share in the high-margin post-paid wireless segment and we think recent pricing action is rational. We also contend Verizon's successful fiber efforts are counterbalancing cable competition. We see 5% revenue growth and EBITDA margin expansion driving 2008 EPS to our $2.72 estimate. We view Verizon as undervalued at a P/E of 13. We are keeping our relative value-based target price at $42. Verizon has a dividend yield of 4.9%. /T. Rosenbluth

S&P MAINTAINS BUY RECOMMENDATION ON SHARES OF WHOLE FOODS MARKETS

WFMI; $38.32

Excluding 8 cents dilution from recent acquisition of Wild Oats Stores, Whole Foods posts December-quarter EPS of 36 cents, vs. 38 cents one year earlier. This was 2 cents below our estimate, reflecting greater-than-expected negative margin impact from new and relocated stores, which accounted for 11% of sales vs. 7% a year ago. "Identical stores" or non-new, non-relocated Whole Foods stores had higher store contribution margins. We are reducing our full-year fiscal 2008 (Sep.) EPS estimate by 8 cents to $1.42, but maintaining both our fiscal 2009 EPS estimate of $1.85 and our 12-month $50 target price, which uses fiscal 2009 EPS as a base. /L. Braverman, CFA