Markets & Finance

S&P Picks and Pans: JP Morgan, Bear Stearns, CME Group, Coventry, BMC Software


Analysts' opinions on stocks in the news Monday

From Standard & Poor's Equity ResearchS&P MAINTAINS BUY OPINION ON SHARES OF JP MORGAN CHASE & CO. (JPM; 36.54):

JPM agrees to acquire Bear Stearns (BSC) in a stock-for-stock exchange, pending approvals. We value the deal at roughly $235 million, about 95% below where BSC's stock closed on Friday and a fraction of its stated book value. JPM estimates roughly $6 billion in transaction costs largely from deleveraging BSC's balance sheet. Based on the significant discount to BSC's book value combined with a $30 billion backing by the Federal Reserve to cover BSC's illiquid assets, and our opinion that the acquisition of BSC broadens JPM's franchise value, we view the deal positively. -S. Plesser

S&P KEEPS SELL OPINION ON SHARES OF BEAR STEARNS (BSC; 30.00):

BSC is trading at about $3.20 per share in pre-market following news that it is being acquired by JP Morgan in an all-stock deal valued at about $2.00 per BSC share. The deal has already passed regulatory scrutiny, requires only shareholder approval, and may close as soon as the end of June. The Federal Reserve is funding about $30 billion of BSC's less liquid assets as part of the deal, and JPM is guaranteeing BSC's trading obligations. We believe the alternative to this proposed deal is bankruptcy. We lower our 12-month target price to 2 from 30. -M.Albrecht

S&P REITERATES BUY RECOMMENDATION ON SHARES OF CME GROUP (CME; 465.99):

CME announces it has reached an agreement to acquire NYMEX Holdings (NMX; 89.9) for about $100 per share in cash and stock, based on Friday's closing prices. The deal is expected to close in the fourth quarter, pending necessary approvals. CME sees $60 million of cost synergies and expects the transaction to be accretive on a GAAP basis within 12-18 months. We view the deal as a positive for CME, as it will provide product diversification into high-growth areas of physical commodities and energy products. We are reducing our 12-month target price to 550 from 600, reflecting lower peer multiples. -J.Willey

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF COVENTRY HEALTH CARE (CVH; 42.75):

CVH cuts its 2008 GAAP EPS guidance to $4.39-$4.50 from $4.42-$4.58, citing higher flu-related costs than expected and estimated lower net investment income given the fall in the Fed Funds Rate. CVH also cut its 2008 revenue forecast to $11.99-$12.49 billion, from $12.35-$12.90 billion, which we think reflects potentially lower net member gains than we expected amid intense competition and the softened economy. Elsewhere, we are encouraged by CVH's view of a flat medical loss ratio on a same-store basis. We are cutting our 2008 EPS estimate by $0.13 to $4.45, but keeping our 48 target price. -P.Seligman

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF BMC SOFTWARE (BMC; 31.28):

BMC has agreed to acquire BladeLogic (BLOG; 27.30), a leading provider of data center automation, for $28 per share in cash, roughly a 19% premium to Friday's closing price, subject to customary approvals. We believe this acquisition will strengthen BMC's IT Service Automation services by integrating compliance, virtualization and network availability. But we view the proposed deal as negative because we expect the transaction to be dilutive to fiscal year 2009 (March) EPS and to increase integration risks. We are keeping our fiscal year 2008 EPS estimate of $1.62 and 12-month target price of 37. -J.Yin


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