Markets & Finance

S&P Picks and Pans: XM Satellite Radio, Molson Coors, Sanofi, Norfolk Southern


Analyst opinions on stocks making headlines Tuesday

S&P MAINTAINS STRONG SELL OPINION ON SHARES OF XM SATELLITE RADIO

From Standard & Poor's Equity Research (XMSR; $15.29)

Shares are up sharply today on what we view as an overly bullish analyst view of potential merger synergies with Sirius (SIRI; $3.60). Supplementing "a la carte" post-merger pricing plan, we note further stepped-up filings aimed to soothe antitrust concerns, and certain lingering and concerted public opposition. Still, with no directly comparable precedent for regulatory approvals, we see less than 50-50 odds of the deal closing. We maintain our strong sell opinion on the XMSR shares, though we keep our hold opinion on SIRI, partly on relative fundamentals. - T.Amobi, CPA,CFA

S&P UPGRADES SHARES OF MOLSON COORS TO BUY FROM HOLD

(TAP; $55.90)

After the conference call on the pending transaction, we have a favorable view of the novel approach of TAP and SABMiller in combining U.S. operations to close the productivity gap with Anheuser Busch ((BUD). Assuming $500 nillion in annual cost savings are accretive to combined U.S. EBITDA of TAP and SABMiller, adding back TAP's Canadian and European EBITDA, applying a peer-average enterprise value/EBITDA of 10.6, backing out net debt and minority interest, and dividing that by shares outstanding, we arrive at a 12-month target price of $65, up from a split-adjusted $49. - R.Mathis

S&P REITERATES BUY OPINION ON AMERICAN DEPOSITARY SHARES OF SANOFI-AVENTIS

(SNY; $44.70)

Sanofi expects to submit 31 new drug filings by the end of 2010, out of 48 late-stage compounds. We believe the pipeline reflects Sanofi's core competencies in thrombosis, atrial fibrillation, hypertension and diabetes. Key products include AVE5026 and idraparinux for thrombosis, Multaq for AF, Ilepatril for hypertension, and rimonabant for diabetes. We see Sanofi attractively valued, trading at 7.4 times estimated 2007 enterprise value/EBITDA, a 22% discount to peers. We are maintaining our 12-month target price of $48, based on our discounted cash-flow assumptions and current euro/dollar exchange rates. - S. Matsubara

S&P DOWNGRADES OPINION ON SHARES OF MICROCHIP TECHNOLOGY TO HOLD FROM BUY

(MCHP; $36.62)

Microchip preannounces September-quarter results, now expecting EPS of 35 cents and sales of $258-$259 million. The company notes that sales were hurt by the housing slowdown and it sees weakness in other consumer-related markets. We do not believe that the weakness reflects market-share loss, and still see pockets of strength in certain end-markets such as PCs. However, we believe Microchip's notable exposure to the U.S. housing market poses risk to growth ahead. We are reducing our fiscal 2008 (ending March) EPS estimate by 10 cents to $1.42 and cutting our 12-month target price by $5 to $38. - C. Montevirgen

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF NORFOLK SOUTHERN

(NSC; $53.82)

With its quarterly earnings scheduled for an Oct. 24 release, Norfolk Southern indicates likely third quarter EPS at 97 cents, below our $1.04 estimate and the Street's $1.05. Primary contributors to weakness were a non-cash charge tied to tax legislation in Illinois and Norfolk Southern's misjudging of its synthetic fuel tax credits. We again trim our third quarter EPS estimate, this time by 7 cents to 97 cents. We also boost the effective tax rate used in our model, decreasing our 2007 EPS estimate 10 cents to $3.65 and 2008's by 10 cents to $4.17. Still, we keep our 12-month $57 target price, believing investors are focused on shipment volumes, which we see rising in 2008. - K. Kirkeby, CFA

S&P DOWNGRADES SHARES OF CHILDREN'S PLACE RETAIL STORES TO SELL FROM HOLD

(PLCE; $21.89)

Children's Place warns that October-quarter EPS will miss prior guidance of 94 cents to $1.02, hurt by unseasonably warm weather and a challenging macro-economic environment. The company thinks sales trends are unlikely to improve near-term and that it will take several quarters to adjust inventory levels. Given this disappointing outlook and likely margin erosion from clearance markdowns, we are cutting our fiscal 2008 (ending January) EPS estimate by $1.35, to $1.00. We are also lowering our 12-month target price on these high-risk shares by $12, to $18, reflecting, as well, revised peer p-e valuations. - J. Asaeda


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