Markets & Finance

S&P Picks and Pans: Sallie, Morgan Stanley, Circuit City, UAL


Analyst opinions on stocks making headlines Wednesday

S&P MAINTAINS SELL RECOMMENDATION ON SHARES OF SLM CORP.

From Standard & Poor's Equity Research

MS; $24.06

The shares of the parent of Sallie Mae are down 18% today as CEO Albert Lord conducted a conference call to discuss SLM's strategy following the failed buyout by J.C. Flowers. The strategy outline includes strengthening SLM's balance sheet, boosting its credit rating, diversifying its funding base, improving relations with the unsecured lending community, and reducing funding costs. However, he provided little detail regarding the securitization environment and mentioned a

possible dividend cut to strengthen its balance sheet. We are keeping our 2007 and 2008 EPS estimates of $2.12 and $2.56. /S. Plesser, F. Braden, CFA

S&P KEEPS SELL OPINION ON SHARES OF MORGAN STANLEY

MS; $48.07

Morgan Stanley posts a November-quarter loss of $3.61 per share vs. $2.08 EPS, wider than our 25 cents loss estimate. Its write-down for mortgage-related exposure totaled $9.4 billion, much higher than we projected, and remaining net exposure totals $1.8 billion. The firm also announces that it has secured a $5 billion investment from China Investment Corp., aimed at bolstering its capital position, and has reorganized certain business functions to improve risk management. We believe that many risks remain despite significant write-downs. We will update following the company's conference call. /M. Albrecht

S&P MAINTAINS BUY RECOMMENDATION ON SHARES OF CIRCUIT CITY

CC; $6.60

Despite our forecast of November-quarter results, to be reported Dec. 21, we continue to view the shares as attractive. We expect Circuit City to post a net loss of 30 cents on a 2% decline in sales, and despite industry strength evidenced by earnings report yesterday from Best Buy (BBY) , we think Circuit City continues to lose market share. However, we believe a turnaround is feasible over the intermediate term. Also, with $2.50 net cash on its balance sheet and trading at a price/sales ratio of under 0.1X, we view Circuit City as a likely acquisition candidate should management fail to execute a turnaround. /M. Souers

S&P MAINTAINS HOLD OPINION ON ADSS OF ALCATEL-LUCENT

ALU; $7.44

The company sells its non-controlling stake in fiber optic manufacturer Draka Comteq for €209 million, representing 40X net profit. We believe the investment was non-strategic and welcome the cash infusion. Fundamentally, however, we believe the operating outlook for the next two years is one of increased negative risks from overcapacity, industry restructuring and global growth issues. As a result, we see the company's efforts toward a turnaround as more challenging. Based on revised P/E and discounted cash-flow analysis, we are lowering our 12-month target price by $2 to $8. /C. VanderElst

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF UNION PACIFIC

UNP; $124.15

UNP cuts its fourth-quarter EPS estimate by 20 cents, primarily reflecting rising diesel fuel costs. It also notes lower freight volumes in recent weeks than anticipated, which it attributes to weather. UNP now forecasts fourth-quarter EPS of $1.70-$1.80, down from previous guidance of $1.90-$2.00. We are lowering our 2007 EPS estimate by 20 cents to $6.80, but maintain our 2008 EPS estimate of $7.85, as we expect fuel cost recoveries in 2008. We continue to see UNP benefiting from coal shipments, but constrained somewhat by economic pressure on its intermodal and industrial businesses. /K. Kirkeby, R. Tortoriello

S&P REITERATES HOLD RECOMMENDATION ON SHARES OF UAL CORP.

UAUA; $35.09

UAL issues an investor update in which it says it expects fourth-quarter passenger unit revenue to be up 11.5%-12.5%, better than we were expecting. The company cites North American capacity reductions and strong revenue in its international unit. The quarter is also being aided by changes to UAL's frequent flyer program, leading to expiration of miles faster than had been accrued for. While we view revenue trends UAL cites as encouraging, we remain concerned about energy prices and the risk that a weakening U.S. economy will negatively impact travel demand. We keep our 12-month target price at $45. /J. Corridore

S&P REITERATES BUY RECOMMENDATION ON SHARES OF TD AMERITRADE

AMTD; $19.69

AMTD reports what we view as strong November monthly trading statistics, with record average revenue trades of 339,000, up 37% year-over-year. All key customer metrics showed growth and AMTD raises its December-quarter EPS guidance to 39 cents from previous 27-33 cents. We believe the firm is benefiting from increased market volatility, which is driving higher trading activity, and from strong new account growth helped by struggles at competitor E*Trade Financial (ETFC). We are raising our fiscal 2008 (ending Sept.) EPS estimate by 12 cents to $1.40, reflecting higher volumes and better margins. /J. Willey


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