Markets & Finance

S&P Picks and Pans: Qualcomm, Wachovia, Fannie, Merck, Lennar


Analyst opinions on stocks making headlines Friday

S&P MAINTAINS HOLD OPINION ON QUALCOMM SHARES

From Standard & Poor's Equity Research

QCOM; $39.76

Qualcomm posts September-quarter EPS of 47 cents vs. 36 cents, in line with our estimate, after 5 cents of stock option expenses but before a one-time tax benefit of 20 cents. Revenues were stronger, as global demand for wireless chipsets remains high, but profitability was hurt by the absence of royalty payments from a large handset provider, which we expect to remain uncollected in fiscal 2008 (Sept.). We are lowering our fiscal 2008 EPS estimate by 19 cents to $1.71 to reflect lower gross margin, higher R&D costs and higher taxes. We are cutting our 12-month target price by $5 to $40 on revised P/E analysis. /T. Rosenbluth

S&P REITERATES BUY OPINION ON SHARES OF WACHOVIA CORP.

WB; $38.54

Wachovia announces it has incurred about $1.1 billion in valuation losses thus far in fourth quarter related to collateralized debt obligations and subprime mortgage exposure. It expects its loan-loss provision to be about $500-$600 million higher than charge-offs in the fourth quarter, reflecting a modest decline in credit quality and slower loan growth and Wachovia's exposure to the California market. We are reducing our fourth quarter and 2007 EPS estimates, each by 56 cents, to 52 cents and $3.85, respectively; and our target price by $5 to $47, 12.2X 2007 projections, a discount to Wachovia's historical multiple. /M. Albrecht

S&P UPGRADES OPINION ON MERCK SHARES TO STRONG BUY FROM BUY

MRK; $57.38

Merck agrees to pay $4.85B to settle majority of the Vioxx heart attack and stroke liability cases. We think Merck is well positioned to financially manage the settlement, with $7.4 billion in cash and short-term investments and projected operating cash flow of $8.7 billion this year. We also think the settlement (well below Street's liability estimates) largely alleviates Vioxx worries from shares. Investors can now focus on what we see as Merck's superior R&D pipeline and strong growth prospects. We raise our target price by $2 to $66 on forward P/E and discounted cash-flow models. Dividend yields 2.7%. /H. Saftlas

S&P DOWNGRADES SHARES OF FANNIE MAE TO HOLD FROM BUY

FNM; $46.20

Fannie catches up with 2007 quarterly results, posting 9-month EPS of $1.15 and third quarter per-share loss of $1.56, vs. EPS of $3.05 and a loss of 79 cents, respectively. Our third quarter estimate was $1.26, and Street expected 99 cents. Although Fannie continues to gain market share, credit deterioration amid declining home prices hurt results. Fannie's provision for losses jumped almost ten-fold to $1.1 billion, and it also wrote down some of its guaranty contracts. We are cutting our 2007 EPS estimate to 15 cents from $4.67, and reducing our 12-month target price by $13 to $52, 1.65X book value of $31.75. /S. Plesser

S&P REITERATES HOLD OPINION ON SHARES OF JETBLUE AIRWAYS

JBLU; $6.89

The shares are down sharply this morning as CFO John Harvey has resigned, and is to be replaced on an interim basis by finance VP Ed Barnes. We see this as particularly negative, given challenges Jet Blue faces. The many operational changes underway now include slowing and redeploying capacity, selling planes, and dealing with congestion at JFK, all while tackling high oil prices. The CFO is obviously deeply involved in all of this. Even so, the shares have already corrected sharply. We reduce our 12-month target price by $3 to $8, 20X our 2008 EPS estimate of 40 cents, above peers. /J. Corridore

S&P REITERATES SELL OPINION ON LENNAR CORP. SHARES

LEN; $19.33

We estimate asset writeoffs and impairment charges of about $300 million for Lennar in November-quarter which would bring our net tangible book value est $1 lower to $30. Our writeoff estimate takes into account a total of $7.8 billion in goodwill, speculative homes owned, construction in progress, land under development, and investment in joint ventures. Our estimate would be in the mid-range of writeoffs booked by Lennar's peers in their recent quarter. With higher exposure to California and Florida markets and applying 0.6X price-to-book value, near large homebuilders, we are lowering our target price to $18 from $21. /K. Leon, CPA


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