Markets & Finance

S&P Picks and Pans: Merrill, Thornburg, PetSmart, NOV, Trump


Analyst opinions on stocks making headlines in Thursday's market

From Standard & Poor's Equity ResearchS&P KEEPS SELL RECOMMENDATION ON SHARES OF MERRILL LYNCH

MER; $49.32

Merrill plans to stop originations at First Franklin, the subprime mortgage operation it purchased just prior to the collapse of the subprime loan market. We think the move is prudent in the current environment, and we had expected it after significant headcount reductions at the unit. Merrill is also soliciting bids for its subprime mortgage servicing operation, which we expect to attract some interest. We are keeping our sell opinion on the Merrill shares, and our 12-month $48 target price, based on a discounted multiple to peers. -M. Albrecht

S&P DOWNGRADES OPINION ON SHARES OF THORNBURG MORTGAGE TO SELL FROM HOLD

TMA; $3.40

Following its failure to meet margin calls, Thornburg received a notice of default on a $320 million reverse repurchase agreement. The default triggers cross defaults on the remainder of Thornburg's reverse repurchase agreements and secured loan agreements. We believe that without a significant capital infusion, bankruptcy is the likely outcome for the company. Given the uncertainty around the remaining value of the company's assets, we are placing our EPS estimates under review. We lower our target price to $1 from $7, since we see limited value remaining for equity holders in a liquidation situation. -J. Willey

S&P REITERATES STRONG BUY RECOMMENDATION ON SHARES OF PETSMART

PETM; $21.03

January-quarter EPS of 59 cents, vs. 56 cents one year earlier, is a penny shy of our estimate as weakness in sales of discretionary supplies caused a narrowing of gross margins. We expect weakness in consumer spending will further challenge margins in fiscal 2009 (Jan.), and we are lowering our EPS estimate to $1.54 from $1.69. We are also initiating FY 10 at $1.78 and trimming our discounted cash-flow (DCF)-based target price by $2 to $30. However, we believe strong demographic trends, brand loyalty driven by a wide array of services, and valuation of shares trading at a P/E-to-growth of about 0.9X, make the stock a compelling value. -M. Souers

S&P MAINTAINS BUY OPINION ON SHARES OF NATIONAL OILWELL VARCO

NOV; $64.01

Following a meeting with company management, we remain bullish on its prospects into at least 2009. We believe the pending merger with Grant Prideco (GRP) will allow NOV to offer a strong portfolio of drill bits, especially polycrystalline diamond compact bits, which pairs well with NOV's downhole motor products. With roughly 160 new rigs under construction or on order globally, we expect NOV's rig technology segment backlog, currently at a record $9.0 billion, to likely to continue to grow. On DCF and relative valuation metrics, we keep our target price of $83. -S. Glickman

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF TRUMP ENTERTAIMENT RESORTS

TRMP; $3.35

Fourth-quarter revenues missed our view, but after review we are more disappointed by expenses and are widening our 2008 per-share loss estimate to 82 cents from a 36-cent loss, as extensive savings initiatives seem complete. On easier comparisons, February looks to be trending positively, notably in slots, which have been hurt by Pennsylvania competition. And we think completion of Taj High Limit Gaming Salon at end of 2007, and opening of a 800-room hotel tower later in 2008, could draw higher-end gaming traffic and help results. But on lower estimates, we trim our target price by $1 to $5. -E. Kwon, CFA

S&P MAINTAINS HOLD RECOMMENDATION ON ORDINARY SHARES OF AEGON

AEG; $14.25

The company posts fourth-quarter operating earnings per ordinary share of 40 cents (EUR 0.28), vs. 50 cents (EUR 0.39) one year earlier, below our estimate of 63 cents (EUR 0.43). The shortfall reflects lower earnings than we expected in the Americas and Netherlands segments, and a higher tax rate than we projected. We believe the company will finding it challenging to increase sales in 2008, and we are lowering our 2008 operating earnings per share to $2.00 (EUR 1.30) from $2.10 (EUR 1.44). We trim our target price to $16 from $17, 8X our 2008 EPS estimate and in line with historical company multiples. -T. Shafi


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