S&P Picks and Pans: Delta, UPS, Intel, Citi, Merrill, Tata

Analyst opinions on stocks making headlines in Thursday's market

From Standard & Poor's Equity Research

S&P REITERATES HOLD OPINION ON SHARES OF DELTA AIR LINES

DAL; $15.38

The Wall Street Journal has published an unconfirmed report that Delta's board of directors will be asked to give permission for the company to begin formal merger discussions with United (UAUA) and Northwest (NWA). Delta has previously said it wants to participate in industry consolidation. We think a combination with a large carrier could provide network benefits, and cost and revenue synergy possibilities, but would face regulatory hurdles, and be complex. We are positive on the benefits consolidation could hold for the U.S. airline industry, should it occur. /J. Corridore

S&P REITERATES BUY OPINION ON SHARES OF UNITED PARCEL SERVICE

UPS; $66.71

UPS reported plans to increase debt and raise its stock buyback authorization to $10 billion from $2 billion, to be completed over the next 24 months. As a result, S&P Ratings services, which operates independently of S&P Equity Research, lowered its credit rating on UPS to AA- from AAA. But we think UPS has balance sheet strength to support higher debt levels, and that a potentially lower share count could more than offset higher interest expense. We are not yet adjusting our model for buybacks. Our target price stays $89, 19.5X our 2008 EPS view of $4.55, the low-end of its historical P/E range. /J. Corridore

S&P REITERATES BUY OPINION ON SHARES OF INTEL CORP.

INTC; $22.45

Shares are lower after New York Attorney General Andrew Cuomo launched an investigation of Intel for possible antitrust violations. The probe focuses on whether the company used monopoly power to exclude competitors or stifle innovation, according to Cuomo. Intel has not issued a formal response. This news follows a similar inquiry by the European Commission last year. While we are concerned about the possible long-term impact of the investigation, and see additional legal expenses ahead, we believe that growth will remain the underlying story over the next few quarters. /C. Montevirgen

S&P REITERATES HOLD OPINION ON SHARES OF TATA MOTORS

TTM; $19.37

Tata's new one-lakh (100,000 Indian rupees, about $2,545) car, is the world's cheapest. However, given diminutive size, lack of basic amenities, as well as a dearth of safety features required in many countries, we will not see such a vehicle in developed markets. Still, for Indian consumers used to riding bikes and motorcycles, the car provides convenience and protection from the elements. We think profits per vehicle are minimal or non-existent, but believe the vehicle creates a benchmark to spur manufacturers to shrink costs and produce relatively low-cost vehicles. /E. Levy, CFA

S&P REITERATES SELL OPINION ON SHARES OF MERRILL LYNCH

MER; $50.48

An unconfirmed story in The Wall Street Journal this morning says that Merrill is close to landing a $3 billion to $4 billion capital infusion, most likely from a Middle Eastern government investment fund. This follows other capital-raising initiatives including outside investments and asset sales. We believe the current move would be another negative for current shareholders because of share dilution. We also believe moves of this type signal internal concerns about capital levels. Our target price remains $48, 1.3X projected book value, in line with reduced peer multiples. /M. Albrecht

S&P MAINTAINS HOLD OPINION ON SHARES OF CITIGROUP INC.

C; $27.49

An unconfirmed report in The Wall Street Journal says Citi is seeking to raise additional capital from foreign investors, stating the size of the investment could reach $10 billion. While we would view this news as a positive step toward improving capital levels, we believe it would further dilute shareholders and almost certainly mean a dividend cut was in the works. We are cutting our 2007 and 2008 EPS estimates to $1.79 and $3.74, from $2.12 and $3.91, respectively, and we are lowering our target price by $5 to $38, 10.2X our 2008 estimate, below its historical average. /F. Braden, CFA

S&P UPGRADES OPINION ON SHARES OF ALCOA INC. TO BUY FROM HOLD

AA; $31.25

Our opinion change is based on our more optimistic outlook for 2008 EPS. Alcoa posts fourth-quarter EPS of 36 cents vs. 65 cents, before special items in both periods, shy of our 46-cent estimate as a result of higher-than-expected costs. But we are increasing our 2008 EPS estimate to $3.05 from $2.85, as we believe that the absence of unscheduled plant outages, as well as reduced costs in Russia and new lower cost production from Iceland, will offset losses in flat rolled products. Based on our revised estimate, we are raising our P/E-based 12-month target price to $42 from $40. /L. Larkin