S&P Picks and Pans: Morgan Stanley, BofA, Merrill Lynch, PepsiCo, Sovereign Bancorp, J&J

Analysts' opinions on stocks in the news Tuesday

From Standard & Poor's Equity Research

S&P RAISES RECOMMENDATION ON SHARES OF MORGAN STANLEY TO BUY FROM HOLD (MS; 21.50):

An unconfirmed report in the Wall Street Journal says MS will receive $10 billion of capital from the U.S. Treasury, as part of a plan by the government to shore up the banking system. The investment will take the form of callable preferred shares with a 5% coupon and will include common warrants equal to 15% of the injection. We think the move will improve confidence in the company and provides MS with a low-cost source of callable capital. We are raising our target price by $12 to $30, equal to projected book value, as we expect the discount to peer multiples will narrow. -M. Albrecht

S&P RAISES RECOMMENDATION ON SHARES OF BANK OF AMERICA TO BUY FROM HOLD (BAC; 26.08):

Our upgrade is based on today's government announcement that it will inject capital directly into U.S. banks. According to an unconfirmed Wall Street Journal report, BAC will receive $25 billion for preferred stock. We believe the added capital will ensure that BAC would not need to return to the capital markets in case credit deterioration is worse than expected. We are encouraged by pending purchase of Merrill Lynch (MER) , believing it fits well with BAC's retail-focused business model. We raise our target price by $5 to $31, a below-historical 1.03 times book value. -S. Plesser

S&P KEEPS HOLD RECOMMENDATION ON SHARES OF MERRILL LYNCH (MER; 20.90):

An unconfirmed story from MarketWatch reports that MER is one of nine financial firms to accept capital from the U.S. Treasury as part of the larger move to shore up confidence in financial firms. MER could receive $12.5 billion in callable preferred shares with an initial coupon of 5%, and would then issue common warrants equal to 15% of the preferred total. We view this as providing MER with low-cost source of capital. We continue to believe MER's acquisition by Bank of America (BAC; 25.98) will gain approvals, and the discount to the implied price of the deal has narrowed. -M. Albrecht

S&P KEEPS BUY OPINION ON SHARES OF PEPSICO INC (PEP; 53.60):

Adjusted third quarter EPS of $1.06, vs. $0.99, beats our estimate by $0.01 but misses Street by $0.02. Sales growth of 10.5% exceeded our view while commodity costs and expenses were worse than our forecast. We were disappointed by 5% fall in non-carbonated volume, particularly Gatorade with its low-single-digit drop. PEP unveiled restructuring plan to save more than $1.2 billion over the next three years. On adverse foreign currency and higher costs, we trim our 2008 EPS estimate by $0.04 to $3.68 and target price to $61 from $78, reflecting a p-e multiple below recent historical low. -E. Kwon-CFA

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF SOVEREIGN BANCORP (SOV; 3.68):

SOV announces Banco Santander (STD; 15.00) will acquire the 75.65% of SOV it does not already own in a stock-for-stock transaction valued at $4.24 a share, based upon Monday's closing price for STD's ADSs. The deal is subject to customary closing conditions, including regulatory approvals in the U.S. and Spain and approval by both companies' shareholders, and is expected to close in the first quarter 2009. In addition, SOV pre-annouced third quarter loss per share of $1.48, vs. EPS of $0.11, much worse than our $0.03 EPS forecast. To reflect the deal value, we are lowering our target price by $1 to $5. -K. Cole-CFA

S&P REITERATES STRONG BUY OPINION ON SHARES OF JOHNSON & JOHNSON (JNJ; 64.85):

Third quarter EPS of $1.17, vs. adjusted EPS of $1.06, is $0.07 ahead of our estimate. Sales grew 6.4%, with 3.1% forex benefit, ahead of our 5% growth forecast. Consumer products rose a solid 13,1%, medical devices grew 8.8% and pharmaceuticals were flat. We are encouraged by these trends, which we see continuing into 2009, along with cost-cutting measures. We believe JNJ has a robust pipeline and we see 7 NDAs by 2010. JNJ raises 2008 EPS guidance to $4.50-$4.53 from $4.45-$4.50, aided by an R&D tax credit extension. We are raising our 12-month target price by $4 to $80, on revised discounted cash flow (DCF). -H. Saftlas, J. Loo-CFA