Markets & Finance

S&P Picks and Pans: Freddie, HP, Target, Comerica, D.R. Horton


Analyst opinions on stocks making headlines Tuesday

S&P DOWNGRADES SHARES OF FREDDIE MAC TO SELL FROM HOLD

From Standard & Poor's Equity Research

FRE; $27.02

Following Freddie's conference call, we are projecting continued losses, largely on higher loss provisions and securities markdowns. Freddie has just $600 million of excess regulatory capital over OFHEO's minimum requirement. As a result, we think it will likely need to raise capital, and will probably cut its dividend and sell more preferred securities. Given capital constraints, we look for portfolio growth to slow. We lower our 2007 estimate to a loss of $5.28 from an EPS of $1.39, and cut our target price to $24, from $49, 0.9X book value, a signficant discount to historical levels. /S.Plesser

S&P MAINTAINS BUY RECOMMENDATION ON HEWLETT-PACKARD SHARES

HPQ; $49.44

HP posts October-quarter EPS of 86 cents (81 cents GAAP) vs. 68 cents (60 cents GAAP), beating our 82 cents estimate. Revenues rose 15%, led by strength in notebook computers and aided by currency effects. Share repurchases aided results and should continue, given a new $8 billion repurchase plan. We believe HP is gaining market share in PCs in a strong year for the PC industry. We are raising our fiscal 2008 (Oct.) EPS operating estimate to $3.40 from $3.30, and initiating a $3.85 projection for fiscal 2009. We are raising our 12-month target price to $61 from $59, based on our updated P/E analysis. /T.Smith-CFA

S&P REITERATES HOLD OPINION ON SHARES OF TARGET CORP.

TGT; $52.79

October-quarter EPS of 56 cents vs. 59 cents misses our 65 cents estimate on weak sales of higher-margin categories such as apparel and home. We believe Target is doing a good job in managing its flow of goods, which helps to keep inventories in line with sales trends, and in controlling expense growth. However, with consumers tightening their wallets, we see sales mix remaining skewed toward lower-margin categories such as groceries and other consumables. We cut our fiscal 2008 (Jan.) EPS estimate by 15 cents to $3.41 and lower our DCF-based 12-month target price by $5 to $60. /J.Asaeda

S&P MAINTAINS BUY OPINION ON D.R. HORTON SHARES

DHI; $11.16

September-quarter loss of 16 cents, vs. year-ago 88 cents EPS falls short of our breakeven estimate, hurt by $367 million in impairment charges for inventory and goodwill. While sales declined 35% year over year, we take positive note of 22% sequential increase from the June quarter. We forecast sales will decline 5.9% for fiscal 2008 (Sept.), but with year-over-year positive sales growth starting in the June quarter. Based on the company's strong cost controls in place, we are raising our fiscal 2008 EPS estimate to $1 from 73 cents. With a strong balance sheet and Horton's goal of $1 billion in cash flow from operations in fiscal 2008, our opinion is buy. /K.Leon-CPA

S&P DOWNGRADES SHARES OF COMERICA TO STRONG SELL FROM HOLD

CMA; $43.12

We see rising pressure on Comerica's commercial real estate portfolio, given its exposure to the California and Michigan markets. Nonperforming real estate construction loans rose to $59 million from $4 million over the past year. We also expect further deterioration in Comerica's home equity portfolio, with 75% exposure to Midwestern markets. We are lowering our 2007 and 2008 EPS estimates to $4.71 and $4.60, respectively, from $4.75 and $5.09. We are also cutting our 12-month target price to $39 from $59, 8.5X our 2008 EPS estimate, and a discount to Comerica's historical average. /F.Braden-CFA

S&P DOWNGRADES OPINION ON MEDTRONIC SHARES TO HOLD FROM BUY

MDT; $45.25

October-quarter EPS of 58 cents vs. 59 cents is 8 cents below our estimate; we attribute the shortfall to the mid-October recall of Fidelis ICD leads. We think visibility on a near-term rebound in the ICD segment remains low and we expect increased competitive pressures in global coronary stent markets. We are cutting our fiscal 2008 (Apr.) EPS estimate by 21 cents to $2.50, after 9 cents dilution from the Kyphon purchase, and fiscal 2009's by 15 cents to $2.95. As we see more challenging conditions ahead, we are lowering our 12-month target price by $10 to $50, based on a modest forward-P/E discount to large-cap peers. /R. Gold


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