Markets & Finance

S&P Picks and Pans: Morgan Stanley, Merrill, Citi, TiVo, Staples


Analyst opinions on stocks making headlines Tuesday

S&P DOWNGRADES OPINION ON SHARES OF MORGAN STANLEY TO SELL FROM HOLD

From Standard & Poor's Equity Research

MS; $50.21

We believe additional write-downs to its mortgage-backed securities portfolio may be necessary beyond those forecast by Morgan Stanley at the end of October. We expect a further deterioration in the ABS collateralized debt obligation marketplace to put additional pressure on fair value measurements, and we now look for a writedown of about $4.2 billion, up from $3.7 billion figure at Oct. 31. We are widening our November-quarter loss forecast by 19 cents to a loss of 25 cents and cutting our fiscal 2007 (Nov.) EPS estimate by 19 cents to $5.98. We are reducing our target price by $15 to $45, 1.5X projected book value, a discount to peers. /M. Albrecht

S&P DOWNGRADES SHARES OF MERRILL LYNCH TO SELL FROM HOLD

MER; $52.91

We believe further deterioration in the mortgage securities market has put further downward pressure on the value of ABS CDOs on the balance sheet at Merrill. Remaining net exposure to these products at the end of third quarter was more than $21 billion, and we expect additional write-downs in the range of 25%-30% of these assets in the fourth quarter. We are reducing our fourth-quarter and 2007 EPS estimates by $3.06 to losses of $1.82 and 17 cents, respectively, and lower our 2008 EPS estimate by 98 cents to $7.62. We are cutting our 12-month target price by $20 to $48, 1.3X projected book value, a discount to peers. /M. Albrecht

S&P REITERATES HOLD OPINION ON SHARES OF CITIGROUP

C; $30.70

Citi announces plans to sell Equity Units, with mandatory conversion into common shares, to the Abu Dhabi Investment Authority, in the amount of $7.5 billion. The units will pay a fixed annual payment of 11%, and the conversion will not total more than 4.9% of Citi's total shares outstanding. The deal should help boost the company's Tier 1 capital level and help Citi reach its 7.5% capital ratio target by June, 2008. Although we view the 11% yield as fairly high, we believe the move will help ease investors' fears about a possible cut in Citi's dividend. /F. Braden, CFA

S&P MAINTAINS HOLD OPINION ON SHARES OF TIVO

TIVO; $5.90

TiVo unveils a multi-year pact under which General Electric's (GE) NBCU would deploy its DVR-enabled ad products and promotional features across NBC's TV networks and stations. As the first of a seemingly comprehensive deal with major TV player, we think pact is crucial boost for TiVo's efforts to jump-start ads as potential long-term dual revenue stream. NBC's pact could spawn interest from other TV majors, as industry transitions to ratings era based on commercial ratings + time-shifted 3-day DVR viewing (vs. live program ratings). We see a mixed October-quarter report tomorrow. /T. Amobi, CPA, CFA

S&P REITERATES BUY RECOMMENDATION ON SHARES OF STAPLES

SPLS; $22.39

Before one-time items, October-quarter EPS of 42 cents vs. 36 cents is one cent better than our view. North American Retail delivered what we see as weak results, exemplified by a 3% decline in comparable-store sales. We anticipate softness in that segment to extend well into calendar 2008 due to macro headwinds that are affecting small businesses and consumers. However, we expect continued strength at both North American Delivery and International segments, and believe Staples will dominate peers in terms of execution. We maintain our fiscal 2008 (Jan.) and fiscal 2009 EPS estimates of $1.43 and $1.64, respectively. /M. Souers

S&P UPGRADES RECOMMENDATION ON SHARES OF ACTIVISION TO BUY FROM HOLD

ATVI; $18.93

Activision raises guidance for December-quarter, now expecting revenue of $1.225 billion and EPS of 75 cents, compared to its previous guidance of $1.05 billion and 55 cents, respectively. According to The NPD Group, Activision was the leading video game publisher in the U.S. for October, with 28.7% market share, driven by strong sales of Guitar Hero III and Call of Duty 4. We see continued momentum of these titles, along with other established franchises such as Tony Hawk. We are raising our fiscal 2008 (Mar.) EPS estimate by 15 cents to 87 cents, and our 12-month target price by $4 to $30 on our higher earnings outlook. /J. Yin


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