Markets & Finance

Downgrading Applied Materials and KLA-Tencor to Hold


Applied Materials (AMAT) **) and KLA-Tencor (KLAC) to hold from buy, based on valuation and industry trends. S&P sees indications that next-generation 300mm purchases will face further delays. Existing 200mm capacity is very high, and significant expansion is unlikely. S&P believes these two companies are gaining market share and will lead in an upturn, but now sees a strong upturn unlikely until late 2002. With shares of these quality semiconductor equipment makers trading above trough valuations on price-to-sales and price-to-book valuations, S&P would hold but not add to positions for now.

Bank of America (BAC): Maintains 4 STARS (accumulate)

Analyst: Steven Biggar

The company posted Q3 EPS of $1.28 vs. $1.31, in line with estimates. The company experienced impressive double-digit growth in net interest income, aided by a much improved margin from a falling rate environment, though noninterest income was hurt by a sharp drop in investment gains and lower investment banking profits. The jump in loss provisions was expected as the company deals with weakening credit quality. Bank of America is setting up for better 2002 results with the recent exit of subprime real estate and auto lease businesses. S&P is lowering the EPS estimates to $4.85 for 2001 and $5.30 for 2002 to account for a less robust economy.

Fannie Mae (FNM): Maintains 3 STARS (hold)

Analyst: Erik Eisenstein

The company posted Q3 operating EPS of $1.33 vs. $1.09, a penny above the Street's consensus. This excludes changes in the market value of purchased options. Fannie Mae continues to benefit from an excellent operating environment, with a steep yield-curve and continuing re-financing boom. Credit experience also is strong, though any adverse developments would lag economic weakness. S&P would likely take a severe economic downturn to affect Fannie Mae. For now, he believes Fannie is fairly valued at 13 times S&P's 2002 EPS estimate of $5.92, given the certain amount of political risk.

E*Trade Group (ET): Maintains 3 STARS (hold)

Analyst: Robert McMillan

E*Trade Bank unit agreed to acquire over 33,000 retail and transaction-based customer accounts, with over $1.5 billion in deposits, from Chase, subject to regulatory approvals. This immediately accretive acquisition should help lessen the company's dependence on on-line brokerage business and enhance net interest margins in its banking business. S&P is maintaining the operating EPS estimates of $0.08 in 2001 and $0.35 in 2002. Given the weak stock market, intense competition, and valuation over 2.0 times S&P's 2001 $1.2 billion net revenue estimate for E*Trade, S&P would not add to positions.


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