Markets & Finance

S&P Picks and Pans: Morgan Stanley, WaMu, Toll Bros., Cognizant


Analyst opinions on stocks making headlines Wednesday

S&P REITERATES HOLD OPINION ON SHARES OF MORGAN STANLEY

From Standard & Poor's Equity Research

MS; $68.51

August-quarter EPS from continuing operations of $1.38 vs. $1.75 is shy of our $1.67 estimate. Morgan Stanley was hurt by loan and lending commitment markdowns and trading losses related to quantitative strategies that totaled nearly $1.5 billion. Asset management and wealth management results were both stronger than we expected, however, and the operating environment has improved. We are reducing our fiscal 2007 (ending November) and fiscal 2008 EPS estimates by 41 cents and 70 cents, respectively, to $8.06 and $7.61. We are keeping our 12-month target price at $73, 2.0 times our projected 12-month book value, in line with peers. /M. Albrecht

S&P UPGRADES OPINION ON SHARES OF WASHINGTON MUTUAL TO HOLD FROM SELL

WM; $38.63

Our upgrade is based on yesterday's 50 basis-point cut in the Fed funds target rate to 4.75%. Although we are still concerned about the quality of WaMu's loan portfolio, and the possibility that increases to loss provisions will be needed, we expect a reduction in borrowing costs will boost the company's net interest income in coming quarters. We now project net interest margin to top 3.0% by the fourth quarter, up from our forecast of 2.95% for the third. We are raising our 12-month target price by $6 to $39, 10 times our 2008 EPS estimate of $3.90, still a discount to its historical average in order to reflect our credit concerns. /S. Plesser

S&P UPGRADES OPINION ON SHARES OF TOLL BROTHERS TO BUY FROM HOLD

TOL; $22.72

We think Toll will be one of the few profitable homebuilders in 2007, and that it stands to benefit from lower mortgage rates, especially for jumbo mortgages, which are used to buy the company's luxury homes. We believe Toll, with one of the strongest balance sheets, can gain market share against weaker peers. Toll has an attractive land portfolio that can be brought into development with stronger demand in 2008. Applying a 1.3 times multiple to our estimated book value -- relatively high compared to peers to reflect our view of a premium franchise -- we are raising our target price by $3 to $28. /K. Leon, CPA

S&P UPGRADES SHARES OF COGNIZANT TECHNOLOGY SOLUTIONS TO STRONG BUY FROM BUY

CTSH; $74.30

Due to changing peer valuations, we are lowering our 12-month target price by $8 to $90, based on a peer-premium p-e of 30 and a p-e-to-growth ratio of 0.97 times, using our 2008 EPS estimate of $3.00 and an estimated 3-year growth rate of 31%. But we believe that the stock's recent sell-off, which we attribute to fears related to Cognizant's exposure to the financial sector, leaves it very attractively valued. We see Cognizant in a better position than peers, based on its U.S. base of operations and rapid revenue growth rate. We note that Cognizant has announced a $100 million stock buyback plan. /D. Cathers


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