Markets & Finance

S&P Picks and Pans: Red Hat, GM, Sprint, Nasdaq, Kraft


Analyst opinions on stocks making headlines Wednesday

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF RED HAT

From Standard & Poor's Equity Research

RHT; $18.89

August-quarter EPS of 9 cents vs. 5 cents one year earlier is in line with our estimate. Total revenue rose 28% to $127 million as the company continues to see strong demand despite increased competition. However, a 26% rise in billings is down from 50% three quarters ago. We see revenue growth rates moderating on slower-than-expected adoption of JBoss middleware, and project higher R&D and marketing expenses for virtualization products. We are keeping our fiscal 09 (ending February) EPS estimate at 54 cents, and reiterate our 12-month target price of $22 based on a blend of our discounted cash flow and price-to-earnings analyses. /J. Yin

S&P REITERATES HOLD OPINION ON SHARES OF GENERAL MOTORS

GM; $34.42

Although full details are not yet disclosed, we believe the tentative GM pact with the UAW, subject to approvals, should significantly enhance the company's profitability. The establishment of a VEBA (Voluntary Employees' Beneficiary Association) healthcare fund removes a major liability and expense for the automaker. However, expected benefits are partly offset by immediate costs to fund the VEBA and by GM's resultant reduced liquidity. Ultimately, we see a need for sustained progress on the product side or GM risks a renewal of the cycle of plant closures and employee layoffs. /E. Levy, CFA

S&P MAINTAINS HOLD OPINION ON SPRINT NEXTEL SHARES

S; $18.47

At an industry conference, Sprint provided an update on its WiMAX initiatives that includes soft launches in select major metro cities by the end of 2007 and expansion of coverage to more markets in the middle of 2008. We remain skeptical of the WiMAX benefits for Sprint, since in our view the company faces challenges retaining and winning wireless customers using multiple current technologies before the expectedly higher capital spending. We view WiMAX as a threat to incumbent wireless carriers, but believe there is a greater need for the technology in less densely populated markets. /T. Rosenbluth

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF NASDAQ STOCK MARKET

NDAQ; $36.61

Nasdaq and Borse Dubai have increased their offer for OMX AB by 15% to SEK 265 per share cash per OMX share, amounting to about $4.9 billion total, and reduced the minimum acceptance level for the offer to more than 50%, from more than 90%. With Nasdaq and Borse Dubai controlling, or having options on, 47.6% of the outstanding OMX shares, we believe today's moves increase the likelihood that the bid will be successful. We think the revised offer is positive for Nasdaq, and should allow it to move closer to removing some of the uncertainty around its international strategy. /J. Willey

S&P REITERATES HOLD OPINION ON SHARES OF KRAFT FOODS

KFT; $34.16

Despite an unconfirmed report in the Financial Times of bids being due, we do not believe Kraft should be in a rush to sell its Post cereal or other businesses. In our view, a nervous capital market could limit bidding. Also, we expect that Kraft's balance sheet and cash flow can already absorb pending acquisition of Danone biscuit business for about $7.5 billion, which we expect will close by year-end. Excluding any future acquisitions or divestitures, and before special items, we are raising our 2007 and 2008 EPS estimates to $1.82 and $1.92, from $1.77 and $1.90. Our target price remains $34. /T. Graves, CFA


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