Markets & Finance

S&P Picks and Pans: Wachovia, ImClone Systems, Weyerhaeuser, Red Hat, CBRL Group


Analysts' opinions on stocks in the news Monday

From Standard & Poor's Equity ResearchS&P DOWNGRADES OPINION ON SHARES OF WACHOVIA TO SELL FROM HOLD (WB; 23.80):

Wachovia announces that it will replace Ken Thompson as CEO with Lanty Smith, its current chairman. This move comes after what we view as a series of disappointments, including an ill-timed purchase of Golden West in the spring of 2006. Other mishaps followed, including risky BOLI investments, which resulted in $315 million in writedowns, and a current investigation into WB's role into a money-laundering case. Based on the current turmoil, we are lowering our 12-month target price by 5 to 21, which is 8.4 our 12-month forward EPS estimate of $2.50, a discount to peers. -S. Plesser

S&P REITERATES HOLD OPINION ON SHARES OF IMCLONE SYSTEMS (IMCL; 41.01):

FLEX non-small cell lung cancer study shows a 5-week survival benefit for Erbitux over chemotherapy alone. Based on this result, we see the drug as well positioned for FDA front-line approval, but we still see uptake limited to Avastin-ineligible patients. In addition, Erbitux shows a lack of efficacy among colorectal cancer patients with mutated KRAS gene (around 40% of sufferers), which we believe could dampen usage in the colorectal segment. We see ongoing share volatility amid intense competition and emergence of new data, and we trim our 12-month target price by 4 to 46. -S. Silver

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF WEYERHAEUSER (WY; 61.50):

We are lowering our EPS estimates for WY because we expect high home inventories and falling home prices to lead to further losses in the homebuilding and wood products businesses in 2008 and into 2009. We are cutting our 2008 projection to a loss of $0.30 from EPS of $0.50, and 2009's to EPS of $1.25 from EPS of $1.40. WY recently said that it was unlikely to convert to REIT structure in 2008 or 2009, but the move is possible in 2010. We are reducing our 12-month target price to 68 from 72, based on lower real estate values in our sum-of-the-parts analysis. -S. Benway-CFA

S&P DOWNGRADES RECOMMENDATION ON SHARES OF RED HAT TO SELL FROM HOLD (RHT; 24.36):

Our downgrade is based on valuation, as RHT's shares have appreciated above our 12-month target price, which we keep at 20 based on a blend of our discounted cash flow and p-e analyses. Although increased competition from Oracle (ORCL; 22.00) has not materialized, we see organic revenue growth for RHT decelerating due to a sluggish IT spending environment and more difficult year-over-year comparisons. We expect flat operating margins, reflecting higher operating expenses and additional investment in its infrastructure. We maintain our fiscal year 2009 (February) EPS estimate of $0.47. -J. Yin

S&P RAISES OPINION ON SHARES OF CBRL GROUP TO HOLD FROM SELL (CBRL; 28.11):

Our upgrade reflects our view that CBRL is now fairly valued after having fallen 13% since announcing April-quarter results on May 28. EPS of $0.46, vs. $0.44, was above our $0.44 forecast, as CBRL sharply curtailed incentive compensation accruals and, through a variety of beneficial tax issues, was able to reduce its effective tax rate to 22.5% from 34.4%. We view the quality of earnings in the April-quarter as inferior to prior quarters. Even though we raise our fiscal year 2008 (July) EPS estimate by $0.10 to $2.90 on lower tax rate, we cut our DCF-based target price by 2 to 29, on lower cash flow outlook. -M. Basham


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