S&P Picks and Pans: Fannie Mae, Adobe Systems, Thornburg, Ross Stores, General Mills

Analysts' opinions on stocks in the news Wednesday

From Standard & Poor's Equity Research

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF FANNIE MAE (FNM; 33.40):

The OFHEO says it will reduce the capital requirement of government sponsored enterprises Fannie Mae and Freddie Mac (FRE; 31.70) to 20%, and will consider further reductions. The OFHEO will also permit the GSEs' capital surplus to be invested in mortgages and MBSs. Combined with the earlier release of portfolio caps, these initiatives should allow the GSEs to do more in the jumbo market, subprime refinancing and loan modification areas. Though this will likely result in higher net interest income for the GSEs, we believe higher provisions will offset much of these gains. -F. Braden, CFA

S&P MAINTAINS BUY RECOMMENDATION ON SHARES OF ADOBE SYSTEMS (ADBE; 34.46):

February-quarter operating EPS of $0.42 vs. $0.27 are in line. Sales grew 37% to $890 million, $15 million above our view, on strength in CS3 and forex. We think ADBE's mobile segment, though small in sales, shows promise; more than 100 million devices were shipped with Flash Lite in the February-quarter. We think ADBE benefits from access to frequent channel updates, which could help it to act quickly to cut spending if the economy worsens. We lift our fiscal year 2008 (November) EPS estimate by $0.02 to $1.70, and set fiscal year 2009's at $1.85. We raise our target price by $1 to $40, 21.6 times our fiscal year 2009 EPS estimate, within historical ranges. -Z. Bokhari

S&P REITERATES HOLD RECOMMENDATION ON SHARES OF THORNBURG MORTGAGE (TMA; 2.50):

TMA reaches agreement with a number of its lenders to restructure its obligations and reduce its future margin-call exposure. In conjunction with these moves, TMA plans to issue at least $1 billioni in convertible senior subordinate notes with a 12% coupon, which are convertible at $0.75 per share. While we believe these actions provide TMA with the liquidity and flexibility to avoid bankruptcy, we view the dilution to existing shareholders as high and expect a materially negative impact on near-term earnings. We see reduced near-term risk but believe uncertainty remains high. -J. Willey

S&P LOWERS OPINION ON SHARES OF ROSS STORES TO HOLD FROM BUY, ON VALUATION (ROST; 28.46):

January-quarter EPS of $0.70, vs. $0.66, beats our estimate by $0.01, reflecting interest income. The dresses, home, and shoes categories drove a 1% same-store sales gain. Men's merchandise showed sales improvement but women's underperformed. We believe ongoing mix issues in women's and a weakening economy will limit same-store sales growth to 1.5% in fiscal year 2009 (January). But we see ROST's tight inventory and expense controls supporting modest operating margin expansion this fiscal year. We reiterate our fiscal year 2009 EPS estimate of $2.10 and our 12-month target price of $30. -J.Asaeda

S&P REITERATES HOLD RECOMMENDATION ON SHARES OF GENERAL MILLS (GIS; 59.85):

Before some special items, February-quarter EPS of $0.87, vs. $0.74, tops our estimate by $0.08. We see some upside coming from an earnings rise at a joint venture and grain merchandising activities. However, we are impressed by a 12% sales rise and 6% volume increase. We are raising our fiscal year 2008 (May) EPS estimate by $0.02 to $3.48, which excludes a $0.30 benefit from non-cash items but includes some special items including restructuring-related. We are upping our fiscal year 2009 EPS estimate by $0.04 to $3.79, but keep our 12-month target price of 63. Indicated dividend yield is about 2.7%. -T.Graves-CFA