S&P Picks and Pans: Wells Fargo, Washington Mutual, TW Telecom, JC Penney, Avery Denison

Analysts' opinions on stocks in the news Tuesday

From Standard & Poor's Equity Research

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF WELLS FARGO (WFC; 33.18):

In an 8-K filing, WFC says it has $480 million exposure to preferred securities of government-sponsored enterprises. Since this represents roughly 1% of shareholder equity and 1.4% of tangible equity, we view the exposure as insignificant, but expect it will reduce third quarter results. We lower our third quarter and 2008 EPS estimates by $0.08 to $0.42, and $2.03, respectively, but keep our 2009 forecast of $2.40. Based on our positive view of the government bailout of the GSEs and its implication for lowering mortgage rates, we are raising our target price $3 to $36, an above-peer 15 times our 2009 EPS projection. -S. Plesser

S&P KEEPS HOLD RECOMMENDATION ON SHARES OF WASHINGTON MUTUAL (WM; 3.36):

Shares are down sharply today, outpacing the declines of other financials. We continue to weigh concerns about WM's high concentration of home equity and option-ARM loans, but we continue to believe the firm has a high quality banking franchise, and we keep our hold recommendation. We expect continued volatility in the shares until new management can improve its capital ratios, and some stability in the housing market is realized. We are trimming our target price $2 to $4, about 0.4 times recent tangible book value, a discount to peers. -K. Cole-CFA, M. Albrecht

S&P MAINTAINS HOLD OPINION ON TW TELECOM SHARES (TWTC; 14.83):

In an 8-K filing, TWTC says it experienced strong sales in July and August, following 6% growth in first half 2008 relative to 2007, but that growth is being limited by economic pressure in both the Midwest and Southeast U.S. As such, customer churn, which rose modestly in the second quarter, could trend higher in the third quarter. We believe our forecast for revenue growth to slow to 7% in 2008 and 4% in 2009 reflects both the challenges and the demand we expect for the company's voice and data services from larger customers. With our view of its still-faster EBITDA growth than peers, we would hold TWTC. -T. Rosenbluth

S&P LOWERS OPINION ON J.C. PENNEY SHARES TO HOLD FROM BUY, BASED ON VALUATION (JCP; 43.60):

After recent price rise, JCP shares are now approaching our 12-month target price of $46. We view the JCPenney brand as a leading shopping choice for middle-income families. With inventory now aligned with sales, and the company reporting good customer response to new brands, we project merchandise margin improvement ahead. We also expect JCP to maintain tight cost controls without compromising customer service and off-mall expansion, which we view as growth drivers. We reiterate our fiscal year 2009 (January) EPS estimate at $3.50 and fiscal year 2010's at $3.80. -J. Asaeda

S&P REDUCES RECOMMENDATION ON SHARES OF AVERY DENNISON TO HOLD FROM BUY (AVY; 45.60):

AVY says results for July-August EPS were $0.15-$0.20 below its internal forecast, citing further economic weakness in markets served. We note that September normally accounts for over half of third quarter results. We believe that domestic roll materials continued to show negative comparisons, while Europe may have also weakened from prior modest growth. We also suspect that the office supplies back-to-school season was sluggish. We are cutting our third quarter EPS forecast to $0.75 from $1.02 vs. $1.00, full-year 2008's to $3.40 from $3.85, and our target price by $5 to $50. -R. O'Reilly-CFA