Analyst Picks and Pans

Analyst Picks and Pans: BAC, MGM, LEN


Bank of America (BAC)

Goldman Sachs upgrades to buy from hold

In upgrading Bank of America stock and adding it to the firm's "Americas Conviction Buy List," Goldman Sachs analyst Richard Ramsden gave two reasons for his upgrade: the bank's operating profits should help offset rising loan losses, and potential dilution to current stockholders is likely to be less than expected. Ramsden increased his 12-month price target to $15 from $7.

In a May 18 research note, Ramsden said Bank of America is likely in the middle of raising $8.5 billion in new capital through the issuance of common stock, selling portions of the shares each day until it hits its targeted capital goal. It will likely then offer to exchange preferred shares for common stock to raise another $8.5 billion, Ramsden said. Uncertainty about exactly how many shares that would add, and thus dilute current stockholders, had weighed on the bank since it announced its capital raising efforts, he added.

With those efforts nearing an end, removing that uncertainty helps provide assurances to investors buying shares. Ramsden estimates Bank of America's share count will increase to 9 billion shares from about 6.4 billion, implying 30 percent dilution.

Bank of America will also benefit from continued strong business during the second quarter. Ramsden said capital markets and mortgage banking revenue have remained strong, though likely not as good as they were in the first quarter. Ramsden estimates capital markets operations will generate $6 billion in the second quarter, while mortgage banking revenue will total $3 billion.

He projects Bank of America will earn 25 cents per share during the second quarter. Ramsden cut his full-year earnings estimate to 85 cents per share from 90 cents per share to account for share dilution.

MGM Mirage (MGM)

JPMorgan upgrades to overweight from neutral

An upgrade by JPMorgan and the purchase of about 14.3 million shares by majority shareholder Kirk Kerkorian sent MGM Mirage stock surging on May 18.

Joseph Greff of JPMorgan lifted MGM's rating, citing the casino operator's recent plan to raise $2.5 billion in capital. Greff said in a client note that the plan has improved the company's liquidity position. MGM plans to use the capital to help pay down some of its $14 billion debt and improve its balance sheet.

The move should "enable the company to fund all bond maturities this year and next and takes any bankruptcy/ongoing concern risk off the table for two years, if not longer," Greff wrote.

Aside from MGM's capital plans, Greff believes the company may also benefit from the low expectations surrounding its CityCenter development. The project's challenges include the consumer spending pullback and capacity set to roll out over the next year, according to Greff.

Greff predicts MGM can meet or possibly beat expectations near-term, and he raised the company's price target to $11 from $9.

Lennar Corp. (LEN)

Citi Investment Research upgrades to buy from hold

Citi Investment Research analyst Josh Levin said on May 18 that Lennar's $400 million bond sale has strengthened its capital base and will get it through the housing slump. He boosted his target price on the stock by $1 to $12, even as he said the housing market continues to face "serious structural problems."

Levin said in a note to investors Monday that Lennar's debt issuance improves its liquidity, and "significantly reduces the risk that (Lennar) will not make it through the housing downturn."

Further, while Levin doesn't see a recovery in the housing market in the near future, he said that private homebuilders are positive on their May sales. Any better-than-expected data on the housing front will also drive Lennar's stock higher, he said.

Levin also said the company trades cheaply compared to its competitors.


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