S&P Picks and Pans: AIG, Centennial, AT&T, Citigroup, Vodafone, Berkshire Hathaway

Analysts' opinions on stocks in the news

From Standard & Poor's Equity Research

S&P KEEPS HOLD RECOMMENDATION ON SHARES OF AMERICAN INTERNATIONAL GROUP (AIG; 2.11):

Third quarter operating loss of $3.42, vs. operating EPS of $1.35, is worse than our estimate. AIG also unveils revised Treasury bailout plan. Most significant, in our view, is increased commitment to some $150 billion (including purchase of $40 billion preferred shs), a lower interest rate (LIBOR + 3% vs. LIBOR + 8.5%) and a longer loan term (5 vs. 2 years). While execution risk remains, we view these terms as more manageable. We widen our 2008 operating loss estimate to $7.15 from $2.07. Our $3.50 target price assumes AIG stays discounted to historical metrics. We note Sept. 30, 2008 book value of $26.46/share. -C. Seifert

S&P REDUCES OPINION ON SHARES OF CENTENNIAL COMMUNICATIONS TO HOLD FROM BUY (CYCL; 7.81):

CYCL agrees to be acquired by by AT&T (T; 27.74) at $8.50 cash per share, for a total of about $944 million. The price equates to roughly 7 times our 2009 EBITDA estimate for CYCL. While the transaction needs approval from the FCC, which will most likely change under the new administration, we believe the deal will be approved. We note that it would reduce a very competitive Puerto Rico market from six to five competitors. We are raising our 12-month target price by $1.50 to $8.50 based on the deal price. -J. Moorman, CFA

S&P MAINTAINS STRONG BUY OPINION ON AT&T SHARES (T; 27.00):

AT&T announces plans to purchase small wireless carrier Centennial Communications for $8.50 a share in cash, a sizable premium to recent levels, pending necessary approvals. AT&T agreed to pay more than we would have expected, based on a projected enterprise value/EBITDA of 7 times, above peers, but we believe T has flexibility to complete the deal with limited challenges. AT&T expects the deal to initially be modestly EPS dilutive, but given that wireless is a key growth driver, we believe the cash usage for network and customer expansion is appropriate. -T. Rosenbluth

S&P KEEPS HOLD RECOMMENDATION ON SHARES OF CITIGROUP (C; 11.82):

An unconfirmed story in the Wall Street Journal reports that Citigroup is in discussions to buy a rival U.S. bank. The story didn't list a target, but it suggests it is a regional bank with some geographic overlap with Citigroup's current footprint. The search for a deposit base comes after Citigroup lost out on its bid to acquire Wachovia (WB; 5.57). We think Citigroup is trying to expand its deposit base because deposits are a relatively cheap source of funding, and it could utilize the $25 billion it received from the Treasury Department to fund a purchase. -S. Plesser, M. Albrecht

S&P UPGRADES OPINION ON ADRS OF VODAFONE GROUP TO HOLD FROM SELL (VOD; 17.04):

Ahead of release of VOD's September-quarter results tomorrow, we are upgrading our opinion to hold, as the ADR price has fallen through our target price. We expect VOD's first half of fiscal year 2009 (March) sales to be up 17%, and EBITDA to be up 11% due to acquisitions, but we see growth having slowed from June-quarter. We expect that revenues weakened in Western Europe due to regulatory and competitive pressure. Meanwhile, we believe emerging market assets are also likely to show the impact of the current economic weakness. Our 12-month target price remains $20, based on discounted cash flow analysis. -C. Perea

S&P KEEPS HOLD RECOMMENDATION ON CLASS A SHARES OF BERKSHIRE HATHAWAY (BRK.A; 113000.00):

Berkshire posts $1335.00, vs. $1655.00, third quarter operating earnings per Class A share, below our $1450 estimate. Results reflected reduced insurance underwriting profits amid a 44% increase in loss costs, a 10% drop in investment income, and margin contraction in the industrial units. We are trimming our 2008 earnings per Class A share estimate to $5613 from $5922, but keeping 2009's at $6750. Our $130,000 12-month target price assumes the shares trade at approximately 19 times our 2009 estimate, a premium to peers multiple we view as warranted in light of BRK.A's superior financial strength. -C. Seifert