Markets & Finance

S&P Picks and Pans: Berkshire Hathaway, Target, Sallie Mae


Plus: opinions on Merrill Lynch and Consolidated Communications

From Standard & Poor's Equity ResearchS&P MAINTAINS HOLD RECOMMENDATION ON CLASS A SHARES OF BERKSHIRE HATHAWAY (BRK.A; 137980.00):

Unconfirmed report by Associated Press indicate Berkshire is set to acquire 60% of privately held Marmon Holdings from Chicago's Pritzker family for some $4.5 billion in a deal set to close in early 2008. Terms of the transaction also call for Berkshire to acquire the remaining 40% over the next 5 to 6 years. We view the deal positively and believe it enhances BRK's already diverse mix of businesses. But at current levels, BRK shares are fairly valued, in our view. We maintain our 12-month target price at $140,000, or 17.6X our 2008 operating EPS estimate, a premium to peers. - C.Seifert

S&P MAINTAINS HOLD OPINION ON SHARES OF TARGET CORP. (TGT; 51.12):

On continuation of weak traffic trends reported in November, TGT now sees December same-store sales between up 1% and down 1%, reduced from its prior 3%-5% growth estimate. We were projecting a 1% gain. We anticipate higher markdowns on clothing and home categories in the current January-quarter and believe a projected slowdown in consumer spending will further skew sales toward lower-margin merchandise categories next year. We are cutting our fiscal year 2008 (January) EPS estimate by $0.06 to $3.35 and fiscal year 2009's by $0.25 to $3.85. We are also lowering our DCF-based 12-month target price by $5 to $55. - J.Asaeda

S&P UPGRADES OPINION ON SHARES OF SALLIE MAE TO BUY FROM HOLD (SLM; 21.95):

SLM's shares have declined by over 60% from a once agreed-upon buyout price by J.C. Flowers, a deal since terminated. We believe the selloff has been overdone. Also, an investment arm of Goldman Sachs (GS) recently bought a 20% stake in First Marblehead (FMD), which we believe signals that investment banks are willing to enter the student-lending business to make up for lost revenue from the mortgage markets. We are raising our 12-month target price for SLM by $4, to $28, 10.9X our 2008 EPS estimate of $2.56, a discount to its historical average. - S. Plesser

S&P REITERATES SELL OPINION ON SHARES OF MERRILL LYNCH (MER; 53.90):

MER has reached agreements to raise up to $6.2 billion from two investors, and has separately agreed to sell its middle-market commercial finance operations in order to free up capital. We think the moves should provide the liquidity needed to meet capital obligations in the near term as the firm faces additional write-downs because of its remaining mortgage exposure. We believe that favorable terms for the investors and a 12%-13% dilution in equity means the deal is less beneficial to current shareholders, and we continue to view the shares as unattractive. - M.Albrecht

S&P REDUCES CONSOLIDATED COMMUNICATIONS SHARES TO HOLD FROM BUY, ON VALUATION (CNSL; 18.66):

While CNSL's EBITDA margin and cash retention ratios are weaker than peers, we view favorably its relative success with non-voice services and its more stable access line base. We think a pending acquisition will provide more opportunities for video service offerings and increase the company's cushion for dividend payouts, despite adding operational risk. However, with the shares up 14% since late November, we see less total return potential relative to our 12-month target price of $19, based on our enterprise value/EBITDA analysis. CNSL has an above average 8.3% dividend yield. - T.Rosenbluth


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