Markets & Finance

S&P Picks and Pans: Sears, E*Trade, Freddie, VeraSun, AMR, TiVo


Analyst opinions on stocks making headlines Thursday

S&P DOWNGRADES SHARES OF SEARS HOLDINGS TO SELL FROM HOLD

From Standard & Poor's Equity Research

SHLD; $101.12

October-quarter operating EPS of one cent, vs. 80 cents one year earlier, misses our 48 cents estimate on heavy seasonal merchandise markdowns and lack of expense leverage off of a 4.1% same-store sales decline. Given limited success of remerchandising efforts at Sears and Kmart segments, increased competition, and a projected slowdown in consumer spending, we think the company's chances of executing a turnaround are slim. We are cutting our fiscal 2008 (Jan.) operating EPS estimate by $1.00 to $6.75, fiscal 2009's by $1.65 to $6.55, and lower our 12-month target price by $40 to $90 on a revised peer-P/E-based valuation. /J. Asaeda

S&P REITERATES HOLD RECOMMENDATION ON SHARES OF E*TRADE FINANCIAL

(ETFC; $5.28

E*Trade announces a cash infusion of $2.5 billion. The transaction, led by Citadel Investment Group, includes the sale of E*Trade's $3 billion asset-backed securities portfolio for $800 million and a $1.7 billion debt and equity investment. While we view deal terms as less than favorable for E*Trade, we think it prevents a fire sale of the entire company and brings much needed capital stability. Also, R. Jarrett Lilien has been named acting CEO, effectively immediately, replacing Mitchell Caplan. We would not add to positions, given risks of further writedowns from remaining mortgage exposure and likely customer and asset defections. /J. Willey

S&P MAINTAINS SELL OPINION ON SHARES OF FREDDIE MAC

(FRE; $30.07

Demand for Freddie's $6 billion offering of preferred securities seems to be strong, so much so that Freddie no longer needs to issue a convertible component to this security. We look for the issuance to be priced with a yield of roughly 8.5%. However, we continue to believe that Freddie will incur losses in the fourth quarter and into 2008, as declining home prices will likely result in additional markdowns of securities and further increases of credit loss provisions. Based on more favorable pricing of Freddie's preferred issuance, we are increasing our 12-month target price $4, to $25, 0.9X book value. /S. Plesser

S&P MAINTAINS HOLD OPINION ON SHARES OF VERASUN ENERGY

(VSE; $10.89

VeraSun and US BioEnergy (USBE) agree to merge, seeking to gain competitive advantages in the production and marketing of ethanol. US BioEnergy holders would receive 0.81 shares of VeraSun for each US BioEnergy share, and existing VeraSun shareholders would own about 60% of the combined company. The merged company will have nine ethanol facilities in operation, another seven under construction, and about 1.6 billion gallons in annual production capacity by the end of 2008. The deal is expected to close in first quarter 2008, pending necessary approvals. We maintain our 12-month $11 target price for VeraSun. /S. Ham, CFA

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

AMR; $21.98

AMR plans to divest its American Eagle regional airline through a sale, spin-off or other transaction. We are positive on this idea, which we think could free up cash that could be used to further AMR's debt-cutting goal. We also think opportunities to cut regional costs exist. However, we remain worried about high oil prices and AMR's lack of revenue growth, while some competitors are growing capacity. Largely on what we see as increased risks from oil prices, we are cutting our 12-month target to $25 from $28, a below-peers P/E of 8.3X our 2008 EPS estimate of $3.00. /J. Corridore

S&P MAINTAINS HOLD OPINION ON SHARES OF TIVO

TIVO; $5.98

October-quarter loss per share of 8 cents, vs. a 12 cents loss one year earlier, is 3 cents and 5 cents narrower than S&P and Street estimates. While break-even third quarter adjusted EBITDA was in line, we view key standalone subscriber metrics as mixed. Continued sharp losses in the DirecTV (DTV) channel seems tough to replace on nascent cable deals with Comcast (CMCSA) and Cox. We see ongoing differentiation with new ad solutions and broadband video, but note major near-term risk on DVR patent appeal with Echostar (DISH). Our target price stays $7, on relative enterprise value to sales. /T. Amobi, CPA, CFA


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