Markets & Finance

S&P Downgrades Marsh & McLennan to Sell


Marsh & McLennan (MMC): Downgrades to 1 STAR (sell) fom 3 STARS (hold)

Analyst: S. Dawkins

The Massachusetts Pension Board announced that because of concerns over internal controls, it will pull its pension funds from Putnam, a unit of Marsh & McLennan. News reports suggest that California, Connecticut, and Vermont are also considering a similar action. S&P believes this move is likely to further erode investor confidence and may create added outflows. S&P alsos thinks these concerns could taint sentiment toward Marsh & McLennan's insurance brokerage and consulting. Using a sum-of-parts analysis for 2004, S&P sees the shares more properly valued at $37, and recommends selling the shares.

IndyMac Bancorp (NDE): Reiterates 5 STARS (buy)

Analyst: Erik Eisenstein

The mortgage financier's third-quarter earnings per share of 87 cents, vs. 64 cents, beat S&P's estimate of 76 cents and the Street's 74 cents. S&P's loan production estimate was roughly on target, but the expenses estimate was overestimated. Also, loan portfolio growth was above S&P's forecast, driving up net interest income. S&P views this move toward portfolio lending as a positive, which will reduce interest-rate risk. S&P still sees IndyMac taking share of a smaller mortgage market in 2004, reflecting its low relative reliance on refinancings. IndyMac issued $2.90 to $3.25 2004 guidance. S&P is upping the 2004 estimate by 6 cents, to $3.07, and the 12-month target by $1, to $34.

Georgia Gulf (GGC): Upgrades to 2 STARS (avoid) from 1 STAR (sell)

Analyst: Richard O'Reilly

The industrial chemicals manufacturer posted third-quarter earnings per share of 24 cents after a 1 cent charge, vs. 53 cents -- 2 cents above S&P's estimate but in line with Georgia Gulf's guidance. The company saw lower sequential selling prices in caustic soda and vinyl resins, but resin prices rose in September. Aromatic rose to profit on lower raw material costs. Georgia Gulf sees 15 cents to 20 cents fourth-quarter earnings per share before the possible one-time costs of refinancing. S&P still sees 63 cents earnings per share in 2003, and $1.00 in 2004. While S&P's 2004 estimate is below the Street, S&P sees less likely downside in light of expected better industry trends, and is hiking the 12-month target price to $23, from $17.

Cigna (CI): Maintains 3 STARS (hold)

Analyst: Phillip Seligman

Insurer Cigna posted third-quarter operating earnings per share of $1.45, vs. $1.43 -- 20 cents above S&P's estimate. Gains in disability & life and in international outweighed a continued decline in health care. S&P is raising the 2003 earnings per share estimate by 45 cents, to $5.45, the midpoint of Cigna's $5.35 to $5.55 guidance. For 2004, Cigna sees 10% higher health-care results on a lower medical cost trend. But S&P remains concerned by rising competition and declining enrollment. S&P is raising the 2004 earnings per share estimate by 45 cents, to $5.75. Assuming a continuation of Cigna's below-peers' p-e of 10, S&P is raising the 12-month target price to $58, from $53.

AutoZone (AZO): Reiterates 4 STARS (accumulate)

Analyst: Yogeesh Wagle

Shares are down Friday as AutoZone reported that partners affiliated with hedge fund ESL Investments have agreed to sell about 5.6 million of AutoZone common shares via a public offering. S&P's outlook for this market leader remains positive on improving economic conditions and healthy auto sales. Cost-cut efforts, new product introductions, and strong private-label sales should continue to drive sales and margin gains. S&P is raising the fiscal 2004 (Aug.) earnings per share estimate to $6.45, from $6.25, and the 12-month target price to $115, from $106. At a discount to peers and the S&P 500, S&P thinks the shares have appeal.

Hovnanian (HOV): Maintains 4 STARS (accumulate)

Analyst: Michael Jaffe

In light of S&P's new forecast of somewhat stronger near-term housing trends than S&P had previously projected, S&P is raising the fiscal 2003 (Oct.) earnings per share estimate to $7.70, from $7.50, and fiscal 2004's to $8.75, from $8.55. S&P also sees the company benefiting for an extended period from ongoing marketshare gains. Based on a forecast of buyer-friendly mortgage rates through 2006, S&P also thinks the p-e multiples of builders will expand to 10 times to 12 times forward earnings. Using a multiple of 11 times S&P's new fiscal 2004 earnings per share estimate for Hovnanian, S&P is raising the 12-month target price to $96, from $76.


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