Markets & Finance

S&P Picks and Pans: Lehman, GM, Kimberly-Clark, Genentech, Eaton


From Standard & Poor's Equity ResearchS&P KEEPS HOLD RECOMMENDATION ON SHARES OF LEHMAN BROTHERS (LEH; 12.40):

An unconfirmed report in the New York Post suggests that management is seriously considering taking the firm private. The firm is said to believe that unfounded rumors have caused the stock to decline, and rather than sell to an outside suitor at a depressed price, management may choose to take control. Considering insiders own about 30% of shares, we believe such a move would fetch a premium price. While nothing seems imminent, we believe the shares are oversold but risks remain, and management must do something to improve confidence in the firm or face further troubles. -M. Albrecht

S&P REITERATES HOLD OPINION ON GENERAL MOTORS SHARES (GM; 8.92):

We think steps GM is taking to enhance liquidity, including dividend elimination, by $15 billion through 2009 should ease concerns about a potential liquidity crisis. The company was able to avoid, or at least defer, a dilutive share offering. Still, while we view the planned actions generally as positive, we see GM challenged by the accelerated shift from high-profit large pickups and SUVs amid an overall U.S. market weakening, and we expect a sizable Q2 loss. Also, with a potential slowdown in international growth, we cut our target price by 3 to 13, on historical total enterprise value/EBITDA. -E. Levy-CFA

S&P MAINTAINS BUY RECOMMENDATION ON SHARES OF KIMBERLY-CLARK (KMB; 59.80):

KMB announces preliminary Q2 operating EPS of $1.03, vs. $1.04, shy of our $1.09 estimate. The shortfall came from commodity cost pressures, which were about $50 million more than KMB expected going into Q2, and marketing expenses, above our projections. Sales rose 11%, including a robust 7% organic growth. KMB guides for full-year 2008 operating EPS of $4.20-$4.30 down from previous $4.45 to $4.60 guidance. We will update further following this morning's conference call, where we will be listening for further information on pricing initiatives and marketing expenses. -L. Braverman, CFA

S&P REITERATES HOLD OPINION ON SHARES OF GENENTECH INC (DNA; 78.77):

Q2 EPS of $0.76, vs $0.72, is $0.04 below our estimate, reflecting non-recurring charges. Product sales modestly beat our forecast, while 15% higher Avastin sales of $650 million was in line with our view. We expect Avastin sales momentum over near-term on recently approved new uses, but are wary of reliance on this drug amid rising price scrutiny and competition. We view plans to use $7 billion cash to seek new license, acquisition, and buyback opportunites as favorable. We hike our 2008 EPS estimate by $0.02 to $3.22, leave 2009's at $3.64, and raise PEG-based target price by 3 to 84. -S. Silver

S&P MAINTAINS BUY RECOMMENDATION ON SHARES OF EATON CORP (ETN; 79.89):

Adjusted for acquisition integration expenses, ETN posts Q2 EPS of $2.10, vs. $1.70, $0.07 better than our estimate. However, the company reduced midpoint of 2008 EPS guidance by $0.20 to reflect its expectation of slower end market growth in the aerospace, trucks, and automotive segments. In addition, Q2 earnings benefited by a much lower tax rate than anticipated, at 5.9% compared with our projection of 16%, aided by changes in the corporate structure and consolidation of legal entities. We will update after the firm's 10 a.m. ET conference call. -M. Christy-CFA


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