Markets & Finance

S&P Says Sell Fannie Mae


Please see the note below regarding changes to Standard & Poor's STARS ranking system.

Fannie Mae (FNM): Reiterates 2 STARS (sell)

Analyst: Erik Eisenstein

Fannie Mae delayed filing its 10-Q for the third-quarter as it awaits an SEC decision on whether its accounting violated GAAP. We continue to see the SEC finding against Fannie Mae requiring a restatement. Fannie Mae estimates the cumulative effect of a restatement would be a $9 billion loss, nearly a quarter of its reported core capital at June 30. While we don't yet know how the company would react to this kind of capital loss, we are lowering our 2005 earnings-per-share estimate to $7.71 from $8.20, and our target price to $56 from $59. Fannie Mae also provided anticipated third-quarter results consistent with prior accounting, which we viewed as unremarkable.

Allstate (ALL): Maintains 5 STARS (strong buy)

Analyst: Catherine Seifert

ACE Limited (ACE) announced that it received subpoenas from both the New York Attorney General's office and the SEC. The subpoenas request information on non-traditional or loss mitigation insurance. We believe this potentially opens a whole new chapter in the investigation into insurance industry practices, and we expect a number of other insurers to also be subpoenaed. However, we note that Allstate is our only strong buy recommendation in the insurance group and we do not expect Allstate to be significantly impacted by this turn of events.

Intuit (INTU): Reiterates 3 STARS (hold)

Analysts: Scott Kessler, Amrit Tewary

Intuit signed an agreement to sell its Intuit Public Sector Solutions unit to Kintera (KNTA) for about $11 million in cash. The deal, which was originally announced on August 18th, is expected to close during the January quarter, and is subject to customary closing conditions. We believe the sale makes strategic sense for Intuit, as it allows the company to focus on businesses that better fit management's growth criteria. We would hold Intuit shares but would not add to positions, since we believe the stock is fairly valued, based on our discounted-cash-flow analysis.

Northeast Utilities (NU): Downgrades to 2 STARS (sell) from 3 STARS (hold)

Analyst: Justin McCann

While Northeast Utilities shares fell 10% yesterday, after it announced a sharply reduced earnings-per-share outlook for 2005, we believe the stock remains overvalued at its current p-e premium to peers. The new outlook reflects lower-than-expected margins and contracts obtained in recent power auctions, and related exposure to adverse movement in commodity prices. We are reducing our 2005 earnings-per-share estimate 25 cents to $1.15, and our 12-month target price $3 to $16. With a dividend yield of 3.6%, below peers, we believe the stock should trade at a 2% discount to the current peer p-e multiple of 14.2 times our 2005 estimates.

Ace Limited (ACE): Maintains 3 STARS (hold)

Analyst: Catherine Seifert

We expect the shares to come under pressure amid reports that both the New York Attorney General's office and the SEC have subpoenaed ACE Limited, requesting information on non-traditional or loss mitigation insurance. We believe this potentially opens a whole new chapter in the investigation into insurance industry practices, and we expect a number of other insurers to also be subpoenaed. We are maintaining our hold opinion on ACE shares, and note that our only strong buy recommendation is on Allstate (ALL). We do not expect Allstate to be significantly impacted by this turn of events.

Bob Evans Farms (BOBE): Reiterates 2 STARS (sell)

Analyst: Dennis Milton

October-quarter earnings per share of 30 cents, vs. 51 cents a year, is a penny below our estimate. Results were hurt by a 4.2% same-store sales decline and significantly higher food costs. We are lowering our fiscal 2005 (Apr.) earnings-per-share estimate by 23 cents to $1.35 and fiscal 2006's by 15 cents to $1.70, and trimming our 12-month target price by $1 to $21, to account for slower sales trends. At 15 times our calendar 2005 earnings-per-share estimate of $1.61, shares trade at a slight premium to peers. Despite relatively strong growth prospects, we do not believe the premium is warranted, absent a turnaround in Bob Evans' declining customer traffic numbers.

Note: Effective Novermber 12, 2004, Standard & Poor's has modified its Stock Appreciation Ranking System (STARS) nomenclature:

5 STARS now designates a stock ranked strong buy, instead of the previous buy;

4 STARS is now buy, instead of accumulate;

2 STARS is now sell, instead of avoid; and

1 STARS is now strong sell, instead of sell.

The 3 STARS ranking remains as hold.


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