Markets & Finance

S&P Picks and Pans: Alcoa, Office Depot, Sealy, QLogic, Mohawk


Analysts' opinions on stocks in the news Wednesday

From Standard & Poor's Equity ResearchS&P REITERATES BUY OPINION ON SHARES OF ALCOA INC. (AA; 32.33):

AA posts Q2 EPS of $0.66, vs. $0.81, on a 5.9% sales decline, just shy of our $0.68 estimate. Based on the company's expectation for continued power supply disruptions and our forecast for ongoing weakness in key end-markets such as autos, we are cutting our 2008 EPS projection to $2.53 from $2.70. But assuming resolution of the power disruptions, as well as improved operating performance of the Iceland smelter and a higher aluminum selling price, we are keeping our 2009 EPS forecast of $3.22. We are also maintaining our p-e-based 12-month target price of 42. -L. Larkin

S&P UPGRADES OPINION ON SHARES OF OFFICE DEPOT TO BUY FROM HOLD (ODP; 7.12):

After further review of ODP's Q2 earnings pre-release, we believe the shares are well below fair value, which in our view is our 12-month target price of 12 (cut today from 16) - 0.2 times our 2008 sales estimate, below peers and ODP's historical range. We think ODP has sufficient cash on hand to meet working capital and debt obligations, which should enable it to survive the U.S. recession. Nonetheless, we are lowering our 2008 EPS estimate to $0.86 from $1.01, and 2009's to $0.99 from $1.20. But with the stock trading at 8.3 times our 2008 EPS projection, we would buy ODP. -M. Souers, K. Leon

S&P MAINTAINS HOLD OPINION ON SHARES OF SEALY CORP. (ZZ; 6.64):

ZZ reports May-quarter results of $0.13, vs. $0.17, after $0.05 of one-time benefits from revising reserve estimates for warranties, missing our $0.14 estimate. Domestic sales declined 15%, with weak demand and reduced distribution from major stores that shut down. International sales grew 18%. We are forecasting a 12% sales decline in fiscal year 2008 (November), and we are lowering our fiscal year 2008 EPS forecast to $0.45 from $0.70 and fiscal year 2009's to $0.50 from $0.80. Applying a 13.3 multiple, near peers, to our forward EPS projection, we are reducing our 12-month target price to 6 from 9. -K. Leon, CPA

S&P REITERATES HOLD RECOMMENDATION ON SHARES OF QLOGIC CORP (QLGC; 14.80):

Shares are up 6% today as QLGC increases June-quarter forecasts. It now expects net revenue of $166-$168 million, up from previous guidance of $154-$158 million, and operating EPS of $0.30-$0.31, above previous guidance of $0.26-$0.28 and our estimate of $0.26. While we see solid growth in Host and Network products, we continue to be concerned about the weak U.S. economy. We are raising our fiscal year 2009 (March) operating EPS estimate to $1.13 from $1.08. However, we are keeping our 12-month target price of 17 based on a blended peer-discount p-e of 15.7 times and peer-discount PEG of 0.7. -R. Khalid, CFA

S&P MAINTAINS HOLD OPINION ON SHARES OF MOHAWK INDUSTRIES (MHK; 64.90):

After yesterday's market close, MHK reduced its Q2 EPS guidance to $1.23-$1.26 from prior guidance of $1.36-$1.45, which falls short of our $1.41 estimate. The company said all of its flooring product categories will have lower-than-expected sales and margins for Q2. We believe the weakness is attributable to the U.S. housing market, reduced demand in Europe, and rising energy costs. Given inflationary pressures, MHK plans to raise prices, which we think could face headwinds from customers. We will update our EPS forecasts after MHK releases full results for Q2 on July 21. -K. Leon-CPA


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