Markets & Finance

S&P Picks and Pans: Cisco, Ford, McDonald's, WaMu, Morgan Stanley


Analyst opinions on stocks making headlines Thursday

S&P DOWNGRADES OPINION ON SHARES OF CISCO SYSTEMS TO HOLD FROM BUY

From Standard & Poor's Equity Research

CSCO; $30.70

Cisco posts October-quarter EPS of 38 cents vs. 28 cents, above our 34 cents estimate, largely reflecting strong gross margin of 65%. Sales increased 17%, as strong growth in advanced technologies outweighed switching weakness. While we remain impressed with Cisco's broad product and customer balance, we are concerned that a weakening U.S enterprise business, along a larger revenue base will lead to slowing future growth. We are lowering our three-year earnings growth forecast from 15% to 13%. Based on revised P/E-to-growth analysis, we are reducing our 12-month target price by $3 to $33. /A. Bensinger

S&P REITERATES HOLD OPINION ON SHARES OF FORD MOTOR

F; $8.24

Based on a preliminary report, before special items, Ford posts a third quarter loss per share of one cent vs. a loss of 45 cents, narrower than our projected 8 cents loss and much better than the Street's mean 47 cents loss forecast. The company narrowed its deficit in North America but still lost $1 billion there. Cash performance is doing better than expected and balances were higher than at year-end. We expect a fourth quarter loss in North America and for the company. Net pricing is positive and we see progress in restructuring, but with our outlook for weak U.S. volume through 2008, we see turnaround efforts as fragile. /E. Levy, CFA

S&P REITERATES STRONG BUY RECOMMENDATION ON MCDONALD'S CORP.

MCD; $59.32

October comparable sales rose 6.9%, above our expectations, on surprising strength in the U.S., where comparable sales rose 5.4% vs. a 5.6% gain in October a year ago. Systemwide sales growth of 14.2% suggests strong start to the fourth quarter, for which we project a 10.9% rise. In constant currency, systemwide sales rose 7.8% in Europe and 12.9% in Asia Pacific/Middle East/Africa, we believe a reflection of new menu item rollouts and international expansion. We think results support our above-Street fourth quarter EPS estimate 78 cents, exclusive of 35 cents non-recurring tax benefits. Our target price remains $68. /M. Basham

S&P MAINTAINS SELL OPINION ON SHARES OF WASHINGTON MUTUAL

WM; $19.30

We believe an expanding investigation into the integrity of WaMu's appraisal process will weigh further on its shares. Government sponsored enterprises are now required to carefully evaluate all loans from WaMu to ensure they are valued correctly. This will likely slow the company's already subdued origination levels. And if WaMu is implicated in any wrong-doing, it will likely have to build a reserve for possible returned loans. Separately, we see provisions rising in 2008 amid a deteriorating housing market. We lower our target price by $4 to $15, 9.1X our 2008 EPS estimate of $1.65. /S. Plesser

S&P REITERATES HOLD OPINION ON SHARES OF MORGAN STANLEY

MS; $53.05

Morgan Stanley reports that its CDO and subprime exposure at the end of October was $6 billion, down from $10.4 billion in two months, with revenues reduced by $3.7 billion before taxes ($2.5 billion after tax) over that span because of portfolio write-downs. Although a month remains in the quarter for further changes in the portfolio, we are encouraged by the clarity Morgan Stanley has provided. We are reducing our fiscal 2007 (Nov.) EPS estimate by $1.89, to $6.17, on an expected November-quarter loss of 6 cents, and our 12-month target price by $13, to $60, 1.7X projected book value, a slight premium to peers. /M. Albrecht

S&P DOWNGRADES RIO TINTO LTD. AMERICAN DEPOSITARY SHARES TO SELL FROM HOLD, ON VALUATION

RTP; $454.35

The ADSs of Rio Tinto are up 29% in pre-market trading after news that BHP Billiton (BHP) made an unsolicited offer to acquire Rio Tinto in a stock-for-stock transaction valued at some $110 billion, or $414 per ADS. Rio Tinto has rejected the offer, stating that it significantly undervalues the company. Based on our assumption that BHP will ultimately acquire Rio Tinto, we are raising our 12-month target price to $438 from $250. With the ADSs trading above our revised target price, our opinion is now sell. /L. Larkin


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