Markets & Finance

S&P Picks and Pans: Yahoo, Sun Micro, IndyMac, Hovnanian, Beazer


Analyst opinions on stocks making headlines Tuesday

S&P REITERATES SELL OPINION ON SHARES OF YAHOO INC.

From Standard & Poor's Equity Research

YHOO; $31.36

Shares of Alibaba.com, in which Yahoo is a material stockholder, debuted in Hong Kong and nearly tripled from the IPO price. Yahoo is indicated higher this morning, and we think excitement about the Alibaba IPO has helped propel Yahoo shares in recent weeks; we note they have risen more than 40% since late August. We estimate Yahoo's stake in Alibaba is worth more than its interest in Yahoo Japan, and see this as notable. Despite a clearer and more focused business strategy, however, we still believe Yahoo faces significant fundamental challenges, and see the shares as overvalued. /S. Kessler

S&P MAINTAINS BUY OPINION ON SHARES OF SUN MICROSYSTEMS

JAVA; $5.71

Sun posts September-quarter EPS of 3 cents vs. loss of 2 cents, one cent above our estimate. We are encouraged by this 4th consecutive quarter of profitability and believe results, along with cost-cutting measures, position Sun well to pursue growth opportunities. Strength in high-end products aids margins and drives deferred revenues. We see growth in Europe and Asia favorably impacted by a lower U.S. dollar, offseting weakness in U.S. We see partnerships driving sales growth. We are keeping our 12-month target price at $7, a blend of our discounted cash-flow (DCF) and price-to-sales analyses. /J. Hingorani

S&P MAINTAINS HOLD OPINION ON SHARES OF INDYMAC BANCORP

IMB; $12.77

IndyMac posts a third quarter operating loss of $2.77 vs. an EPS of $1.19, $2.61 below our estimate. Results were hurt by $408 million in credit costs, including a 47% increase in reserves, to $1.39 billion. Results were also hurt by spread widening for sale of IndyMac's non-agency mortgages. Loan production was down considerably on more stringent lending standards and focus on agency-qualifying loans. IndyMac ended the third quarter with $6.3 billion in liquidity, up from $4.1 billion at the end of second quarter. The liquidity stems from increasing its deposit base and FHLB advances. We will update after IndyMac's conference call. /S. Plesser

S&P REITERATES SELL OPINION ON HOVNANIAN ENTERPRISES SHARES

HOV; $10.11

Hovnanian says preliminary net contracts will be 10% lower in the fourth quarter vs. a year ago and home deliveries will fall 19%. In our view, business conditions remain weak as the cancellation rate was 40% year-over-year and above the third quarter's 35% rate. We expect that the tightening of mortgage underwriting standards will continue to increase cancellations for Hovnanian. Despite weak expected Q4 operating results, Hovnanian did reduce total debt by $390 million. We will update our outlook after the company releases fourth quarter results on December 18. We keep our target price at $10, or 0.4X our book value estimate, in line with smaller builders. /K. Leon, CPA

S&P MAINTAINS HOLD OPINION ON SHARES OF BEAZER HOMES USA

BZH; $9.52

Providing preliminary unaudited September-quarter results, Beazer posts a 39% decline in home closings, a 14% reduction in land holdings, and a 28% decline in unsold finished homes. Write-offs of $230 million for inventory impairments and land will be booked along with additional write-offs for goodwill. Despite the board of directors' vote to suspend the dividend of 10 cents per quarter, or $16 million in cash per quarter, the company has what we view as a strong cash position of $460 million in cash. With 25% of total employees recently cut and waivers from lenders on senior notes, we would hold. /K. Leon, CPA


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