Markets & Finance

S&P Picks and Pans: Merrill, WaMu, Alcoa, PepsiCo, XM, Sirius


Analyst opinions on stocks making headlines Friday

S&P REITERATES BUY OPINION ON SHARES OF MERRILL LYNCH

From Standard & Poor's Equity Research

MER; $75.38

Merrill announces that difficult credit market conditions will reduce net earnings for third quarter. The company expects to report a loss of up to 50 cents, reflecting significant markdowns to its CDOs, subprime, and leveraged financed commitments positions. Meriill forecasts that revenue growth will exceed 20% for its equity markets, investment banking, and global wealth management businesses. We are maintaining our 2007 EPS estimate of $8.03, as well as our 12-month target price of $90, based on 1.8 times 12-month projected book value, in line with reduced peer multiples. /M.Albrecht, T.Shafi

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF WASHINGTON MUTUAL INC.

WM; $35.28

WaMu preannounces that third quarter net income fell about 75%, primarily due to a large loan loss provision of approximately $975 million, as well as a total of $410 million in downward adjustments, net losses and impairment losses in the securities portfolios. We are reducing our 2007 EPS estimate by 42 cents to $2.81, but keeping our 2008 estimate of $3.92, on our forecast for net interest margin improvement. We are maintaining our 12-month target price of $39, or 10.0 times our 2008 EPS estimate, which is below WaMu's historical average. /S. Plesser, E. Oja

S&P REITERATES HOLD OPINION ON SHARES OF ALCOA INC.

AA; $37.88

Shares of Alcoa are up in premarket trading on last night's announcement that it intends to proceed with the sale of its Packaging unit and is near a definitive agreement to sell its Automotive casting unit. This follows Alcoa's announcement to sell its stake in Aluminum Corp. of China for some $2 billion. We have a positive view of these transactions as we believe Alcoa will be a purer play on aluminum and alumina after divestment and will generate cash that could be used for buybacks. On that basis, we raise our 12-month target price to $40 from $36. /L. Larkin

S&P DOWNGRADES SHARES OF PEPSICO TO HOLD FROM BUY, ON VALUATION

PEP; $73.85

Shares of PepsiCo recently hit a 52-week high, having appreciated 21% from a low in late 2006. The company's portfolio of products positions it to be a leader in food and soft drink categories, in our view. However, we see heightened competition in the space from increasingly aggressive peers, potentially tempering growth. Based on a historical average high p-e of 24 times, blended with our sum-of-the-parts analysis, we are raising our target price by $4, to $76. But we now view the stock as fairly valued now, though with a 2% yield, we recommend holding its shares for total return potential. /R. Mathis

S&P CONTINUES TO SEE MIXED SIGNALS ON PENDING SATELLITE RADIO MERGER

XMSR; $14.17

SIRI; $$3.40

XM and Sirius set Nov. 13 for a vote on pending deal; we still see regulatory uncertainties. While a post-merger a la carte plan could soothe some anti-trust concerns, it is not clear from recent Washington comments how far the gesture could sway authorities. We note continued stiff opposition amid copious filings and cross-filings since the February, 2007, merger proposal. We expect the Justice Dept.'s ruling in the weeks ahead, followed shortly by the FCC's, to bear on the potential issue of satellite radio market definition. Meanwhile, ahead of third quarter, fundamentals seem less than compelling. /T. Amobi, CPA, CFA


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