Markets & Finance

S&P Downgrades Washington Mutual to Sell


Plus: Analyst opinions on IndyMac Bancorp, Cisco Systems, and more

From Standard & Poor's Equity ResearchWashington Mutual (WM)

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

Analyst: Stuart Plesser

We are concerned about Washington Mutual's exposure to the subprime market and believe the company will need to add more to reserves than has been expected. Roughly 9% of Washington Mutual's loans held are subprime, with a large portion having loan-to value ratios over 80%. In addition, roughly 28% of its loan portfolio is comprised of Option Arms, which we believe have not yet been stress-tested. We are lowering our 2007 earnings per share (EPS) estimate by $0.28 to $3.68, and cutting our 12-month target price by $11, to $37, 10 times our 2007 EPS estimate, below historical levels to reflect a difficult mortgage environment we see.

Emisphere Technologies (EMIS)

Ups to 3 STARS (hold) from 1 STAR (strong sell)

Analyst: Robert Gold and Herman Saftlas

The shares are establishing new 52-week lows today, and have fallen 28% since auditors issued a qualified opinion on the company's financial statements on March 12. Emisphere Technologies continues to anticipate that it will be unable to continue operations beyond September 2007 with existing capital resources. We believe prospects regarding the company's drug pipeline is highly uncertain, but believe the value of its eligen drug delivery technology could attract some external financing and provide support to the stock. Our 12-month target price remains $3.50.

iRobot (IRBT)

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

Analyst: Thomas Smith

In our view, iRobot is likely to face pressure on home robot sales, 60% of the 2006 total, as a housing industry slowdown we project to last into 2008 pinches consumer discretionary spending. The company also faces a seasonally slow sales period and high project development costs in first half of 2007. On the bright side, the German military ordered more PackBot bomb-disposal robots on March 7. We are raising our EPS estimate for 2007 to $0.08 from $0.01, but lowering 2008's to $0.30 from $0.65. Based on our price-to-book analysis, we are lowering our target price to $11 from $18.

Infineon Technologies (IFX)

Upgrades ADRs to 4 STARS (buy) from 3 STARS (hold)

Analyst: C.Van der Elst

Our upgrade is based on our view of Infineon's strong earnings growth potential. The company has won business on a number of new models/customers in the past six months, and we think it is well positioned to grow in the ultra-low-cost, mid-tier, and high-end 3G wireless segments. We also see robust growth in Infineon's other businesses. We are keeping our fiscal 2007 (ending September) earnings per ADS estimate of 49 cents, but raising fiscal 2008's by 8 cents, to 74 cents. We are also increasing our 12-month target price by $1, to $17, based on our discounted cash-flow and relative metrics.

IndyMac Bancorp (NDE)

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

Analyst: Stuart Plesser

Update from earlier note: Our downgrade reflects our view that default rates will pick up significantly for Alt-A loans. As mentioned in an earlier research note, IndyMac's 30-day delinquency rate for its Alt-A loans at Dec. 31 totaled 5.4% compared to 22.7% for

subprime loans. But in a difficult housing market, we think defaults on Alt-A loans, roughly 80% of IndyMac's production, will rise significantly because of an inability for borrowers to refinance. We are lowering

our target price by $6 to $26, 6.6 times the $3.92 EPS we see in 2007, below historical p-es to reflect likely further credit deterioration.

Cisco Systems (CSCO)

Reiterates 3 STARS (hold)

Analyst: Ari Bensinger

Cisco agrees to acquire WebEx (WEBX), a provider of on-demand web collaboration applications, subject to approvals, for $3.2 billion, or $57 per share. We view the price, roughly 8 times 2006 sales, as reasonable, given the strong growth prospects we see for video conferencing. We view WebEx as a good strategic fit for Cisco's unified communication portfolio. We think Cisco's large cash position, at over $20 billion in cash and investments, provides a significant competitive advantage over smaller peers, enabling it to acquire attractive technologies to pursue its growth strategies.


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