Markets & Finance

S&P Picks and Pans: Berkshire, Boeing, XM, Ambac, Thornburg


Analyst opinions on stocks making headlines in Monday's market

From Standard & Poor's Equity ResearchS&P KEEPS HOLD RECOMMENDATION ON CLASS A SHARES OF BERKSHIRE HATHAWAY

BRKA $140000.00

Berkshire reports $1,518 vs. $1,859 Q4 operating EPS, shy of our $2,063 estimate, reflecting 46% lower insurance underwriting profits, 8.5% lower non-insurance operating profits. Full year operating EPS of $6,233 vs. $6,036 was below our $7200 view. At current levels, we view the shares, which are trading at 1.8X year-end '07 book value, fairly valued vs. peers and historical averages. We are keeping our $7,950 operating EPS estimate for '08. Our $152,000 12-month target price assumes the shares maintain their premium-to-peers valuation. /C. Seifert

S&P MAINTAINS BUY RECOMMENDATION ON SHARES OF BOEING

BA $79.39

Boeing loses the KC-135 aerial refueling tanker replacement program to competitor Northrop Grumman. Although the decision on this $30B+ program can still be protested by BA, we see a likelihood Northrop will retain the contract. Because Northrop, who partnered with EADS, was seen as the underdog, we believe the loss by Boeing surprised investors. However, we continue to see the 787 as Boeing's key long-term success story, along with strong 737 sales. We believe Boeing's well-diversified military segment will be able to maintain flat-to-slightly increased sales growth. /R. Tortoriello

S&P REITERATES BUY RECOMMENDATION ON SHARES OF NORTHROP GRUMMAN

NOC $82.10

The Air Force chooses Northrop to provide KC-45A aircraft for the KC-135 tanker replacement program. The initial contract for 4 system design and development aircraft is $1.5 billion. However, the production phase of the contract will involve replacement of 179 tanker aircraft, and is estimated to be worth $30-$40 billion. While Boeing may protest the award, the Air Force indicated it ran the bidding process with great transparency, and we think it likely Northrop would ultimately win. Other team members include General Electric (GE) and Honeywell (HON). /R. Tortoriello

S&P MAINTAINS STRONG SELL OPINION ON SHARES OF XM SATELLITE RADIO

XMSR $11.30

As regulators continue to ponder the proposed merger with Sirius (SIRI), we view the directors' vote to extend the "drop-date" date of the transaction by 2 months, to 5/1/08, as somewhat ominous. Even so, the move wasn't unexpected, given the significant amount of time invested by the parties; the merger was initially announced in Feb. '07. While the move is unlikely to tip regulators' hands one way or the other, we think a decision could be imminent. Despite slightly higher odds of approval, outright rejection also seems within the realm of reasonable possibilities. /T. Amobi, CPA, CFA

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF AMBAC FINANCIAL

ABK $11.14

Ambac announces more steps aimed at shoring up its capital position including a cut in its quarterly common dividend to 1 cent from 7 cents, and the suspension of certain structured finance writings for six months. We believe ABK needs to further distance itself from the structured finance business to regain credibility in the municipal bond insurance market; and also believe the lack of visibility on the much touted "bailout" will keep the shares under pressure. Our $13 12-month target price, reduced $1 today, assumes Ambac shares trade at a discount to historical averages. /C. Seifert

S&P REITERATES HOLD RECOMMENDATION ON SHARES OF THORNBURG MORTGAGE

TMA $8.90

Following Thornburg's disclosure last week of $300M in margin calls on some highly rated Alt-A mortgage securities, Thornburg has received additional margin calls of $270M, the majority of which it has not yet met. Thornburg is in default with one lender, but this lender has not yet exercised its right to liquidate collateral. We expect Thornburg will be forced to sell a portion of its core prime jumbo mortgage holdings, likely at distressed prices, mirroring similar actions in late '07. With shares lower in premarket, we reduce our target price by $3 to $7 to reflect a likely reduction in book value. /J. Willey


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