Markets & Finance

Analyst Actions: Merrill Lynch, Elizabeth Arden, ON Semi


A roundup of Wall Street research on selected stocks for Tuesday

Merrill Lynch

From Standard & Poor's Equity Research

Merrill Lynch (MER) announced on Oct. 30 that CEO E. Stanley O'Neal was to retire. Goldman Sachs kept its neutral rating on the shares.

Analyst William Tanona says he believes the market already factored the event into the stock price on Friday, Oct. 26, when the shares rose 9% after news spread that there were likely to be changes within senior management. Tanona says he is hesitant to get more constructive on Merrill without a clear successor in place. He adds that the probability of additional, significant write-downs increases as it is likely that the new CEO will want to clear the decks. Tanona notes that Merrill still had $15.2 billion of exposure to CDOs and $5.7 billion of exposure to sub-prime mortgages as of the end of the third quarter. Given the remaining high level of exposure, and the firm's limited ability to hedge these assets today, and the deteriorated performance of these assets since the end of the third quarter, Tanona forecasts fourth-quarter writedowns of $4.5 billion.

Merrill shares dropped 2.9% to $65.50 on Oct. 30.

Elizabeth Arden

Wedbush Morgan downgraded its investment recommendation on shares of Elizabeth Arden (RDEN) to hold from buy on Oct. 30.

Analyst Rommel Dionisio says he took the action ahead of the company's first quarter results due out Nov. 2, as his channel checks indicate the company has received a lukewarm response to major fragrance launches for the holiday season, including celebrity fragrances tied to Mariah Carey and Britney Spears. He sees this tempering the company's performance, even though it should still see positive benefits from the impact of a weak dollar on its international business, EPS accretion from the integration of its Sovereign Sales acquisition, and improved results from the rollout of the Danielle Steel celebrity fragrance. The recent stock price run-up was also a factor in the downgrade.

Dionisio sees a 5-cent first quarter loss per share for the company, and maintains a $25 target price.

Elizabeth Arden shares fell 7.4% to $24.67 on Oct. 30.

ON Semiconductor

ON Semiconductor Corp. (ONNN) posted a third-quarter EPS decline on Oct. 30. ThinkEquity said weakness in the shares was "overdone".

Analyst Robert Burleson says ON Semi reported a moderate third quarter upside, but missed on EPS, and guided earnings well below Street expectations. Burleson notes management expects average selling prices (ASPs) to decline 2% sequentially in the fourth quarter and sees cautious demand from its customers. He believes seasonality for the fourth quarter is expected to be weaker for PCs and consumer products, in part prompting ON Semi's weaker guidance.

The analyst cuts his 2007 estimate from 83 cents EPS on $1.570 billion in revenue to 79 cents EPS on $1.564billion in revenue. He also cut his 2008 forecast from $1.07 EPS on $1.705 billion in revenue to 97 cents EPS on $1.676 billion in revenue. While he reduced his estimates, Burleson thinks share weakness is overdone. He upgraded his rating on ON Semi to accumulate from source of funds, with an $11 price target. He believes the shares should trade at a minimum of 11 times his 2008 EPS estimate, even in an uncertain environment.

ON Semi shares declined 14.6% to $10.41 on Oct. 30.


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