Markets & Finance

S&P Picks and Pans: Microsoft, Citigroup, Google, Merrill Lynch, IBM


Analysts' opinions on stocks in the news Friday

From Standard & Poor's Equity ResearchS&P DOWNGRADES RECOMMENDATION ON SHARES OF MICROSOFT TO BUY FROM STRONG BUY (MSFT ; 27.52):

June-quarter EPS of $0.46, vs. $0.31, is $0.01 below our estimate. Revenue rose 18% to $15.8 billion, $136 million above our view, led by strong growth in client, server and tools, and Microsoft Business Division revenues. But earnings were hurt by weakness in online advertising revenue and higher R&D costs. Though MSFT plans to increase headcount in its online services group, we see growth in that business declining, reflecting a tough economy and market-share loss. We lower our fiscal year 2009 (June) EPS forecast by $0.04 to $2.13 and our target price by $6 to $37 on our reduced EPS and revenue growth outlook. -J.Yin

S&P MAINTAINS HOLD OPINION ON SHARES OF CITIGROUP (C; 17.97):

Citi posts second quarter operating loss of $0.49, vs. EPS of $1.25, $0.11 narrower than our loss estimate. Results are after $7.2 billion in pre-tax securities write-downs and a $4.5 billion increase in credit costs. Notably, securities write-downs decreased 42% from first quarter level. Net interest margin improved 34 basis points sequentially, reflecting an improved interest rate environment. Also, expenses declined modestly on a sequential basis. Although we believe the results show sequential improvement, we think hurdles remain due to deteriorating U.S. consumer credit quality. We will update after 8:30 call. -S. Plesser

S&P REITERATES HOLD OPINION ON SHARES OF GOOGLE INC (GOOG; 533.44):

Including stock-based compensation, GOOG posts second quarter EPS of $3.92, vs. $2.93, above our forecast of $3.67, reflecting options expenses that were 9% lower than we projected. Revenues rose 39%, above our 36% estimate, driven by Google-owned websites and international operations. However, shares are indicated lower in after-hours trading Thursday as GOOG acknowledges a more challenging economic environment. We are lowering our EPS estimates for 2008 to $15.94 from $16.18, and 2009 to $19.21 from $19.75 largely on reduced forecasts for interest income. We keep our target price of $550. -S. Kessler

S&P MAINTAINS SELL RECOMMENDATION ON SHARES OF MERRILL LYNCH (MER; 30.73):

MER posts second quarter per-share loss of $4.95 from continuing operations, vs. EPS of $2.10, wider than our projection of a $2.73 loss. Writedowns of mortgage and lending commitments and hedging losses totaled $9.7 billion, and sizable gross exposure remains. MER confirms sale of Bloomberg stake, and is also selling Financial Data Services interest, raising about $8 billion total. We see further writedowns until some stabilization in the housing market and economy occurs. Meanwhile, a number of challenges remain. We widen our 2008 loss estimate to $8.77 from $4.95 loss, but keep $25 target price. -M. Albrecht

S&P MAINTAINS STRONG BUY OPINION ON SHARES OF INTL BUSINESS MACHINES (IBM; 126.52):

IBM reports second quarter EPS of $1.98, vs. $1.55, above our estimate for $1.80. Revenues rose 13%, or 6% on a constant currency basis, led by strength in the services and software segments. The new System Z hardware is being well accepted by customers. Gross margin widened 140 basis points. We believe IBM's global strategy of leveraging hardware, software and services synergies is paying off. We are raising our EPS projections to $9.00 from $8.75 for 2008 and to $10.35 from $10.00 for 2009. In addition, we are increasing our p-e-based 12-month target price to $165 from $155. -T. Smith-CFA


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