Markets & Finance

S&P Cuts Novell to Strong Sell


Plus: Analyst opinions on General Motors and AmeriCredit

From Standard & Poor's Equity ResearchNovell (NOVL)

Downgrades to 1 STARS (strong sell) from 2 STARS (sell)

Analyst: Jim Yin

The downgrade is based on valuation. The stock has appreciated 9% in the past two weeks, after reporting January-quarter results in which revenue declined 16%. We forecast sharp declines in Novell's legacy businesses will more than offset our projected 50% growth in Linux Platform Products revenue. In addition, we believe cost-saving initiatives for the second half of fiscal 2007 (ending October) will adversely affect sales. We are keeping our 12-month target price at $6, based on an enterprise value to sales of 1.4 times, below the industry average of 2.7 times, reflecting our projection of Novell's low profitability.

General Motors (GM)

The company reiterates 3 STARS (hold)

Analyst: Efraim Levy,CFA

Before special items, fourth-quarter EPS of 32 cents vs. an adjusted year-ago loss of $1.97 per share falls below our 97 cents EPS estimate, largely on the effect of weakness in the residential mortgage market on GM's financial operations. We see continued progress in North American automotive operations helping drive profit in 2007, but expect weakness in sub-prime mortgages will likely weigh on equity income from GMAC more than previously forecast. GM faces challenges of intense competition, but we expect UAW negotiations later this year to provide unprecedented improvement in structural costs.

AmeriCredit (ACF)

Downgrades to 2 STARS (sell) from 4 STARS (buy)

Analyst: Frank Braden

We think AmeriCredit's exposure to the subprime auto market will put increasing pressure on its shares as investors look for higher-quality opportunities. While recent acquisitions of companies with higher credit quality lending should help protect the company's returns somewhat on the downside, the vast majority of its loans remain subprime. We are cutting our 12-month target price to $20 from $30. The new target price reflects a multiple of 7.5 times applied to our 2007 EPS estimate of $2.64, based on our expectation of continued multiple contraction.

Viacom (VIA.B)

Maintains 3 STARS (hold)

Analyst: Tuna Amobi

We are raising our 12-month target price by $4 to $44, on sum-of-the-parts and relative valuations. We see film/DVD upside from Dreamgirls, Babel, Charlotte's Web, and full 2007 impact of the DreamWorks deal and DreamWorks Animation (DWA) pact. Though likely to affect 2007 results for Cable Networks segment, we see restructure steps driving sharp margin expansion at MTV, and are encouraged by first quarter scatter ad market trends. Despite potential distraction from the new lawsuit vs. Google's (GOOG) YouTube, we see Viacom on track to nearly double 2907 digital revenue to about $500 million.

Sprint Nextel (S)

Maintains 3 STARS (hold)

Analyst: Ken Leon

Sprint announces today that it is starting its WiMAX network buildout in four Texas markets, and will expand to nationwide coverage by end of 2008. The initial WiMAX build will use network and mobile devices from Nokia (NOK). With a projected cost up to $3 billion for the WiMAX network, and a deteriorating post-paid business with customers leaving the former Nextel service, we believe Sprint will be limited in use of free cash flow for share buybacks. Priced below peers at an enterprise value of 6.7 times our 2007 EBITDA estimate, we would hold Sprint for a potential turnaround in the second half 2007.

Reliant Energy (RRI)

Maintains 4 STARS (buy)

Analyst: Christopher Muir

We continue to like Reliant Energy's EPS growth outlook. We are also bullish on its Texas retail operations, based on the end of mandatory default service on 12/31/06. As a result, default customers that did not choose another plan were switched to Reliant Energy's standard residential service plan starting Jan 1, 2007. The company reported that a significant number of former default customers signed up for longer-term supply service. After adjusting our model, we are increasing our 2008 EPS estimate by $0.06 to $0.72. We are raising our target price by $1 to $22 on the higher estimate.


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