Markets & Finance

S&P Picks and Pans: BofA, Sallie, AMD, Scholastic, CNOOC


Analyst opinions on stocks making headlines Wednesday

S&P MAINTAINS STRONG BUY RECOMMENDATION ON SHARES OF BANK OF AMERICA

From Standard & Poor's Equity Research

BAC; $43.75

BofA expects fourth-quarter writedowns to be larger than the $4.1 billion estimate it announced in November. Although it has not provided any guidance on the size of the larger writedown, it expects to remain profitable in the fourth quarter. Despite the larger writedowns, BofA remains one of the better capitalized banks among its peers and we belive its dividend, yielding 5.8%, is secure. We are lowering our fourth quarter and 2007 EPS estimates by 53 cents each, to 27 cents and $3.53, respectively. We are also cutting our 2008 EPS projection by 35 cents to $4.45, and lowering our target price by $6 to $51, 11.4X that estimate. /F. Braden, CFA

S&P DOWNGRADES OPINION ON SHARES OF SALLIE MAE TO SELL FROM HOLD

SLM; $29.93

Sallie Mae parent SLM Corp. says it has failed to renegotiate buyout terms with investor group led by J.C. Flowers. SLM is replacing J.C. Flowers' capital and we look for the cost of new capital to be higher than historical levels. Also, adverse student-loan legislation combined with a weakening economy will likely hurt results, and we are wary of rising private student loan default rates. We reduce our 2007 and 2008 operating EPS estimates by 8 cents and 10 cents, to $2.12 and $2.60, and cut our 12-month target price to $24 from $45, which at 9.2X our 2008 EPS estimate is at the low end of historical levels. /S. Plesser

S&P REITERATES HOLD OPINION ON SHARES OF ADVANCED MICRO DEVICES

AMD; $8.93

Shares are lower after AMD concludes it will likely take a material impairment charge for goodwill related to the October 2006 acquisition of ATI Technologies. The company has not released a specific amount but will report an estimate soon. In addition to affecting GAAP income results, the potential impairment charge may also negatively impact key financial ratios. Given our belief that AMD will continue to face profitability issues in the near-term, and considering current debt levels, we think this news could contribute to less favorable funding options ahead. /C. Montevirgen

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF SCHOLASTIC CORP.

SCHL; $34.67

Ahead of the November-quarter earnings announcement scheduled for 12/20, we continue to see EPS of $2.01 vs. $1.75. After a strong initial release of the final Harry Potter book last quarter, we expect solid follow-on sales to boost revenues in the trade segment. We also anticipate overseas revenues, where Scholastic garners about 20% of sales, to benefit from a decline in the U.S. dollar. All told, we project revenue growth at about 3.2%. We also forecast a slight operating margin contraction of 20 basis points to 17.0% on our forecast of rising bad debt expense. We keep our 12-month target price of $39. /J. Peters, CFA

S&P DOWNGRADES OPINION ON ADSS OF CNOOC LTD TO HOLD FROM STRONG BUY

CEO; $171.65

S&P Equity Research has lowered forecasts for oil prices, based on Global Insights data indicating that higher Middle East output combined with anticipated three quarters of slow U.S. economic growth should lead WTI to trade at about $74-$76 per barrel over next two years. The absence of a key sentiment driver for CNOOC leads to our downgrade. We are adjusting our earnings per ADS estimates for 2007 and 2008 to $10.94 and $15.57, and cut our 12-month target price to $193 from $231, reflecting lower potential value for its P1 and P2 reserves. Our target price assumes 12.4X our 2008 EPS. /L. Tan

S&P MAINTAINS HOLD OPINION ON SHARES OF INTERNATIONAL SPEEDWAY

ISCA; $43.18

The company raises its fourth-quarter EPS guidance by 5 cents on better margins, but announces that results will include an impairment charge of between 48 cents and 96 cents related to Motorsports Authentics. Though we will exclude this charge, we are nevertheless disappointed with its size. Based on margins, we are raising our 2007 EPS estimate to $2.75 from $2.72. But revenue guidance for next year was below our projection, and we are trimming our 2008 EPS estimate to $3.13 from $3.20. We are also reducing our 12-month target price to $49 from $51 on a blend of our discounted cash-flow and historical analyses. /E. Kolb


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