Markets & Finance

S&P Picks and Pans: J.C. Penney, Apollo Group, TD Ameritrade, Schwab


Plus: analysts' opinions on Activision and KB Home

From Standard & Poor's Equity ResearchS&P REDUCES OPINION ON SHARES OF J.C. PENNEY TO HOLD FROM BUY (JCP; 36.76):

We think the JCPenney brand remains a leading shopping choice for middle-income families, and see promise in new merchandising initiatives and an incremental growth opportunity in off-mall expansion. But with JCP reporting disappointing sales through Easter and lowering its April-quarter EPS guidance to $0.50 from $0.75-$0.80, we think fiscal year 2009 (January) is shaping up to be more of challenging year for the company than we had anticipated. We are cutting our fiscal year 2009 EPS estimate by $0.70 to $3.70, and reduce our 12-month target by $15 to $40 based solely on historical p-e valuation. -J. Asaeda

S&P DOWNGRADES SHARES OF APOLLO GROUP TO SELL FROM BUY (APOL; 42.55):

Shares are off 24% this morning. February-quarter EPS of $0.41 vs. $0.41, both before one-time items, is $0.11 below our forecast, new student gains decelerate to 6.2%, and enrollment counselor compensation and costs to expand staff rose more than we expected. We are cutting our fiscal year 2008 (August) EPS estimate by $0.25 to $2.70, fiscal year 2009 by $0.40 to $3.00. On our view of a lack of consistency in results and little future visibility, we are sharply cutting our target price to $39 from $99, 14 times our calendar 2008 estimate, on a PEG ratio of 1.2 using APOL's low-double-digit long-term profit growth goal. -M. Jaffe

S&P LOWERS OPINION ON SHARES OF TD AMERITRADE TO HOLD FROM BUY (AMTD; 16.46):

We are increasingly concerned about the potential impact of a prolonged bear market on AMTD's retail trading activity, limiting the favorable near-term catalysts we see for the shares. February trading volumes were below our expectations, and we do not expect a material improvement in March. We see margins being pressure by the high level of advertising spending and by increased customer incentives from primary competitor E*Trade (ETFC; 3.79). We are reducing our 12-month target price by $5 to $18, 13X our 2009 EPS estimate of $1.38, on concerns and lower peer multiples.-J.Willey

S&P UPGRADES OPINION ON SHARES OF CHARLES SCHWAB TO BUY FROM HOLD (SCHW; 18.54):

Our upgrade reflects a recent narrowing of the valuation premium between SCHW and its discount-broker peers, and our favorable opinion of SCHW's client base and brand. While we have some concerns about slowing retail trading activity, particularly if the equity markets continue to decline, we believe SCHW's revenue streams are better diversified than other discount brokers and that SCHW will benefit from higher exposure to fee-based businesses. We are lowering our 12-month target price by $3 to $22, 16.5 times our 2009 EPS estimate of $1.33, reflecting reduced peer multiples. -J.Willey

S&P RAISES RECOMMENDATION ON SHARES OF ACTIVISION TO BUY FROM HOLD (ATVI; 27.35):

Our upgrade reflects improving fundamentals and a favorable outcome we see from pending merger with Vivendi Games, which we expect to close in the first half. We are raising our March-quarter revenue forecast by $50 million to $400 million and our EPS estimate by $0.02 to $0.04 based on strong sales of Guitar Hero III and Call of Duty 4, despite concerns about a U.S. economic slowdown. We think the pending merger will strengthen global distribution and could be accretive by as much as $0.15 to fiscal year 2009 (March) EPS. We keep our 12-month target price of $33, based on a blend of relative metrics. -J. Yin

S&P REITERATES SELL OPINION ON SHARES OF KB HOME (KBH; 24.76):

February-quarter per-share loss of $3.47 vs. year-ago EPS of $0.34 includes $239 million in asset impairments and a $100 million deferred tax valuation allowance charge. Results compare with our $2.26 loss estimate. Sales and orders fell 43% and 75%, respectively, from a year ago, and we project a near 50% sales decline for fiscal year 2008 (November). We widen our fiscal year 2008 loss estimate to $6.85 from $2.00. Despite a strong balance sheet, in our view, with $1.3 billion in cash, we are concerned about KBH's exposure to Arizona and California markets. Using 0.75 times our $20 book value estimate, near other large builders, we keep our $15 target price. -K. Leon-CPA


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