Markets & Finance

S&P Keeps Sell on Countrywide Financial


Plus: Analysts' opinions on Ford, UnitedHealth, Credence Systems, Consol Energy and VeriSign

From Standard & Poor's Equity ResearchCountrywide Financial (CFC): Maintains 2 STARS (sell)

Analyst: Stuart Plesser

CFC posts February loan fundings of $35 billion, 11.7% over last year but 6% below January's figure. Non-prime fundings totaled 7%, vs. 8.9% last year. CFC's delinquency rate on its servicing portfolio was 4.71%, even with last month but 9.8% higher than last year's period. We believe the company's gain-on-sale margin will come under pressure due to concerns about loan defaults in the secondary market. We are also wary of CFC's heavy exposure to Option Arm loans. We are reducing our 2007 EPS estimate by 19 cents to $4.18. We are lowering our target price by $2 to $34, 8.1 times our 2007 EPS estimate.

UnitedHealth Group (UNH): Reiterates 4 STARS (buy)

Analyst: Phillip Seligman

UNH agrees to acquire Sierra Health Services (SIE) for $2.6 billion in cash by yearend 2007, pending necessary approvals. UNH informs us of its intention, if its proposed acquisiton of Sierra Health closes before yearend, to set up a loss contract reserve so that the losses of an unprofitable SIE plan do not affect UNH's P&L. This 142,000-member Medicare plan is unprofitable because of its offer of branded drug coverage. We see UNH's acquisition of SIE, pending necessary approvals, strengthening UNH's presence in Nevada: SIE has 310,000 commercial members in Nevada, and 320,000 Medicare and Medicaid members, of which 184,900 are in Medicare drug plans in 10 states. Separately, UNH plans $4.0-$4.5 billion in 2007 share buybacks. We are keeping our target price of $62.

Credence Systems (CMOS): Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: David Kaplan

We believe Credence Systems shares are attractively valued after their decline of roughly 28% since the company reported disappointing January-quarter results on Mar. 1. We are encouraged by 10% order growth in the January quarter, book-to-bill of 1.17, and company comments indicating some of the engineering business is returning. Incorporating our view that the transition to new leadership poses challenges, we apply a target price-to-sales multiple of 1.0 on our calendar 2007 sales estimate, a 30% discount to the 3-year historical average of 1.5; as such, we are maintaining our target price of $5.

Ford Motor (F): Reiterates 3 STARS (hold)

Analyst: Efraim Levy, CFA

We view favorably Ford's planned deal to sell its Aston Martin unit for $925 million. We think the price is a good one and the cash proceeds would help shore up the company's balance sheet. The sale would also provide Ford with one less distraction, in our view, so it would be better able to focus on new products for its volume offerings. Ford's retention of a stake in the sports car maker should allow it to share in its future profits. The deal, subject to regulatory approval, is expected to close in second quarter. We would not be surprised to see Ford sell another vehicle brand from its portfolio.

Consol Energy (CNX): Reiterates 4 STARS (buy)

Analyst: Christopher Lippincott

We are raising our 12-month target price to $42 from $37 to reflect an increase in our assumptions for long-term coal production and average realized prices, and to bring our target price into line with increased market multiples for Consol's peer group. We believe the company, the second largest domestic coal producer by total reserves and production volume, deserves to trade in line with its peer group average market multiple. Our revised 12-month target price is based on our discounted cash-flow and relative valuation analyses.

VeriSign (VRSN): Reiterates 2 STARS (sell)

Analyst: Scott Kessler

VeriSign announces it received a letter indicating that the company is not in compliance with Nasdaq filing requirements. We expected this announcement given the Mar. 1 filing VeriSign made with the Securities & Exchange Commission, indicating it would not be able to file its 10-K in a timely fashion due to a pending restatement following options backdating. We are surprised that VeriSign is taking so long to complete this restatement, given that the company was aware of potential backdating issues in mid-2006. VeriSign is also not able to repurchase shares until it corrects its financials and files them with the SEC.


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