Markets & Finance

S&P Keeps Sell on Kraft after Spin-Off News


But analyst Raymond Mathis says its parent Altria remains a strong buy. Plus: Opinions on Allstate, Creative Technology, and more

From Standard & Poor's Equity ResearchAltria Group (MO)

Reiterates 5 STARS (strong buy)

Kraft Foods (KFT)

Reiterates 2 STARS (sell)

Analyst: Raymond Mathis

Altria's directors today made the long-anticipated announcement that the company will spin off its nearly 89% remaining stake in Kraft. Altria shareholders of record as of Mar. 16 will receive a stock dividend on Mar. 30 of approximately 0.7 shares of Kraft per Altria share owned.

We believe this move will allow each company to sharpen strategic focus, become more nimble, and adjust respective capital structures to make acquisitions and compete more effectively. We reiterate our 12-month target price for Altria of $110, based on our sum-of-the-parts valuation.

However, we see restructuring charges as likely, and believe execution risk will be greater for slower-growing Kraft. We anticipate near-term pressure on Kraft shares and continue to view them as unattractive.

Allstate (ALL)

Maintains 5 STARS (strong buy)

Analyst: Catherine Seifert

Allstate reports $1.78 vs. $1.49 fourth quarter operating EPS, 3 cents shy of our forecast. Full-year 2006 $7.67 vs. $2.37 operating EPS reflected impact of lower catastrophe losses, partly offset by higher reinsurance costs. We are trimming our 2007 EPS estimate by 10 cents to $7.50. We continue to view Allstate shares as undervalued compared to peers, and we believe the company is better positioned than peers to withstand what we see as a more competitive pricing environment. We are maintaining our 12-month target price of $75, 10 times our 2007 EPS estimate, a discount to most peers.

Creative Technology (CREAF)

Reiterates 1 STAR (strong sell)

Analyst: Richard Stice, CFA

Excluding one-time gains, we calculate that Creative posted December-quarter EPS of 12 cents, vs. 2 cents one year earlier, better than our 5-cent loss per share estimate. Revenues declined 17%, excluding license payment from Apple Inc. We are narrowing our fiscal 2007 (ending June) loss per share estimate by 8 cents, to 20 cents. We are raising our 12-month target price by $1 to $6. While we are encouraged by December-quarter profitability, we remain concerned by the competitive environment as well as ongoing reduction in R&D spending. As a result, our recommendation is strong sell.

Levitt (LEV)

Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: T.Smith-CFA

Levitt agrees to be acquired by significant shareholder BFC Financial Corp. (BFF), subject to necessary approvals. The proposed deal will exchange each Levitt class A common share for 2.27 shares of BFC, or about $14.41 based on BFC's Jan. 30 closing price of $6.35. Separately, Levitt warns of fourth quarter revenues at a level below our estimate, an order cancellation rate of 60%, and costs for reduction of inventory planned. We are raising our 12-month target price to $15 from $9, which is approximately in line with the bid and is based on total return.

Neustar (NSR)

Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: J.Yin

Our upgrade is based primarily on valuation. Shares of Neustar have declined about 8% in the past month despite, in our opinion, the company's good fundamentals. We believe Neustar benefits from the consolidation in the telecom industry, which requires subscribers to change service providers. The company gets paid for nearly every transaction to a phone number. We forecast 27% revenue growth in 2007. We are keeping our target price of $36, based on an industry P/E-to-growth ratio of 1.5X, or 31.6X our 2007 EPS estimate of $1.14, which we cut today from $1.16 to adjust for an acquisition.

Nationwide Health Properties (NHP)

Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: JWilley

With Nationwide Health Properties up 11% year to date, 49% since July 1, 2006, we see limited room for further appreciation, given the shares' valuation at the high end of peer group, and our outlook for only moderate earnings growth. While we continue to view Nationwide Health Properties's senior living and long-term care portfolio as well positioned, with shares trading at 16.5 times our 2007 per-share funds from operations estimate, we think Nationwide Health Properties's growth prospects and the value of its real estate are fully reflected in current share price. We are raising our 12-month target price by $3 to $33, supported by our net asset value calculation.


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