Markets & Finance

S&P Stock Picks and Pans: Countrywide, Citi, BofA, Whole Foods


Plus analyst opinions on E*Trade and China Mobile

From Standard & Poor's Equity ResearchS&P MAINTAINS SELL OPINION ON SHARES OF COUNTRYWIDE FINANCIAL

CFC; $21.47

Despite yesterday's announcement by Countrywide that it is able to borrow $11.5 billion from its lenders to fund its operations, we are maintaining our sell opinion and 12-month target price of $20. We have longer-term concerns about the housing market and about the credit quality of Countrywide's mortgage portfolio, and we see Countrywide's gain-on-sales margins contracting significantly in third quarter. Our target price implies a price-to-earnings ratio of 7.1 times our 2007 EPS estimate of $2.82, a discount to Countrywide's five-year average, based on our concerns about the housing market and credit quality. /S.Plesser, E. Oja

S&P KEEPS POSITIVE FUNDAMENTAL VIEW ON OTHER DIVERSIFIED FINANCIALS SUBINDUSTRY

The Fed's move today to cut its discount rate by 50 basis points has stocks in the group trading higher. We view the move as a positive one that should allow for increased liquidity in the market. Investors may also perceive the move as a sign that the Fed may be more willing to intervene in the coming months with a reduction of the Fed funds rate, supporting the rally. We believe the stocks in this sub-industry have been oversold, and our top ranked picks remain Citigroup (C; $48.15) and Bank of America (BAC; $51.50), based on diversified business mixes, valuations and strong yields. /M. Albrecht

S&P MAINTAINS BUY OPINION ON SHARES OF ETRADE FINANCIAL

ETFC; $13.94

We applaud the company's recent disclosure informing investors about the quality of its mortgage portfolio. The first-lien mortgage portfolio is comprised of primarily high-quality borrowers, with generally low loan-to-value ratios. We are somewhat concerned by the high percentage of second-lien loans, and expect further loss provisions there. Liquidity concerns seem overdone, and we do not see much balance-sheet risk. We are keeping our 2007 EPS estimate of $1.64, but are raising our 12-month target price $2 to $17, 10.4 times that estimate, below peers but up on improved clarity. /M. Albrecht

S&P REITERATES HOLD OPINION ON SHARES OF WHOLE FOODS MARKET

WFMI; $43.06

Whole Foods is closer to completing the purchase of Wild Oats (OATS; $17.86) after a judge rejected the FTC's attempt to block the proposed deal. Whole Foods could complete the transaction as early as Monday Aug. 20 if a stay is not granted to the FTC by an appeals court. We continue to view the approximate $700 million transaction as favorable, based on our view of the benefits from removal of a competitor, entrance into new markets and sharing of best practices. Following the court decision, we are raising our 12-month target price $2 to $46, on revised p-e and discounted cash-flow analyses. /J. Agnese

S&P MAINTAINS BUY OPINION ON ADSS OF CHINA MOBILE

CHL; $53.39

China Mobile reports a solid 26% rise in first half net profit to 37.9 billion Chinese yuan, broadly in line with our expectations. The company declared an interim dividend of HK$0.922, up from year-ago HK$0.71. Average revenues per user were down just slightly as higher per-user average usage almost offset a tariff reduction. Total subscribers grew by 21% compared to the same period last year, reflecting expansion into rural regions, which aided a 22% revenue rise. We keep our 2007 and 2008 earnings per ADS estimates at $2.59 and $3.00, respectively, and our 12-month target price stays at $64. /R. Lin


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