Markets & Finance

S&P Picks and Pans: Fannie Mae, Freddie Mac, GE, Rohm & Haas, Wachovia, Homebuilders


Analysts' opinions on stocks in the news Thursday

From Standard & Poor's Equity ResearchS&P MAINTAINS HOLD OPINION ON SHARES OF FANNIE MAE (FNM; 12.39) AND SELL OPINION ON SHARES OF FREDDIE MAC (FRE; 7.38):

We remain concerned by thin capital levels at the government-sponsored mortgage enterprises. When assets are marked-to-market, FNM's fair value shareholder equity is negative $2.1 billion while Freddie Mac's is negative $16.9 billion. Given the steep drop in share price, further capital raising will likely be difficult and expensive. We also think that further home price declines will weigh on capital levels. We do believe FNM will be able to raise capital on more favorable terms than FRE. We reduce our FNM target price by 3 to 15, a historically low 0.7 times book value. We are reducing our target price for FRE by 5 to 6, a historically low 2.0 times book value. -K. Cole, CFA

S&P MAINTAINS BUY OPINION ON SHARES OF GENERAL ELECTRIC (GE; 27.33):

GE says its primary focus for its Consumer & Industrial sub-segment is now on spinning off the entire unit to shareholders. The unit includes lighting, home appliances, and industrial products. We view C&I as the last of GE's high-volume, low-margin businesses, and as such, does not fit with the rest of the company's business portfolio. We believe the move signals that GE was not able to get what it saw as an adequate price for its world-class appliance business. Given our view of GE's excellent division-level management, we think a spinoff will be beneficial for shareholders. -R. Tortoriello

S&P MAINTAINS HOLD OPINION ON SHARES OF ROHM & HAAS (ROH; 44.83):

In a surprising move, Dow Chemical (DOW; 34.00) agrees to buy Rohm & Haas for $18.8 billion, or $78 per share in cash. The proposed merger, which is subject to approvals, is expected to be accretive in the second year. If completed, Dow would become the world's largest specialty chemicals producer and derive 70% of its sales from specialty chemicals. We note that in December 2007, DOW agreed to form a joint venture for $9 billion involving its global polyethylene businesses with Kuwait's Petrochemical Industries Company. We raise our target price for ROH to 78 from 56 to match deal terms. -R.O'Reilly, L. Larkin

S&P MAINTAINS SELL OPINION ON SHARES OF WACHOVIA (WB; 14.79):

WB names Treasury Undersecretary Robert Steel as CEO, ending a six-week search. Separately, WB preannounces that its second quarter loss will total $1.23-$1.32, vs. our estimate of a $0.29 profit, due largely to higher provisions. Specifically, provisions will likely total approximately $4.2 billion, vs. $2.8 billion in the first quarter. In addition, we believe WB will write down a signficant portion of its investment in Golden West. We are reducing our 2008 EPS forecast to a loss of $0.87 from a profit of $1.61 and our 12-month target price by 2 to 13, a slight discount to tangible book value. -S. Plesser

S&P MAINTAINS NEUTRAL OUTLOOK ON HOMEBUILDERS SUB-INDUSTRY:

We were not surprised by the 50% year-over-year increase (3% quarter-to-quarter decline) in June foreclosure filings. As one of the most pessimistic indicators about the U.S. housing market and the prospects for the homebuilding industry, the current high rate of foreclosures does not bode well for near-term demand for U.S. homebuilders, in our view. We believe the increased supply of foreclosed houses into the market is keeping U.S. housing inventories near a record 11-month level vs. a normalized five to six months, even with fewer new homes for sale as builders raise cash to reduce debt. -K. Leon-CPA


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