Markets & Finance

S&P Picks and Pans: Bank of America, Genentech, Yahoo, Microsoft, Schering-Plough


Analysts' opinions on stocks in the news Monday

From Standard & Poor's Equity ResearchS&P MAINTAINS SELL OPINION ON SHARES OF BANK OF AMERICA (BAC; 30.22):

Based on higher net interest margin and lower securities writedown assumptions, we are raising our 2008 EPS estimate by $0.16, to $2.25. Based on preliminary results, BAC is taking a $12.8 billion writedown on its Countrywide purchase. By our analysis, we believe writedowns will ultimately reach at least $20 billion, not including additional litigation risk. BAC has still not committed to guaranteeing Countrywide's debt. In our opinion, the ultimate fate of that debt may be tied to the severity of writedowns. (Note: Earlier, S&P upgraded BAC to sell from strong sell.) BAC posts Q2 operating EPS of $0.72, vs. $1.28, $0.20 above our estimate and $0.19 above consensus. The better-than-expected results reflect a 6% sequential increase in net interest income due to significant margin expansion and lower securities writedowns. Credit quality deteriorated sequentially, but reserves appear adequate. BAC asserts that its Countrywide acquisition will be accretive this year; still, we remain wary. We are raising our target price by $7 to $26, 10 times our 12-month forward forecast of $2.58. -S. Plesser

S&P RAISES OPINION ON SHARES OF GENENTECH TO BUY FROM HOLD (DNA; 92.94):

Majority shareholder Roche Holdings RHHBY) announces cash offer to acquire the 44% of DNA shares it does not already own for $43.7 billion, or $89 per share. Roche will need approval of majority of DNA holders to complete the deal. Since we do not expect such approval at this premium of less than 10% from last week's closing price, we expect the offer to be raised. We are increasing our 12-month target price by $22 to $106, a valuation of 8 times our 2009 revenue forecast of $14.1 billion, a premium to peers, but lower than recent biotech deal premiums because of Roche's already majority ownership stake. -S. Silver

S&P REITERATES HOLD OPINION ON SHARES OF YAHOO INC. (YHOO; 22.45):

YHOO announces a settlement with activist Carl Icahn, who concludes his proxy battle. Eight members of YHOO's board will stand for re-election and, after the shareholder meeting, the company will expand to 11 directors, including Icahn and two individuals from a group that includes his proposed slate and Jonathan Miller, the former chairman and CEO of AOL. This development occurred following recent indications that YHOO's board was gaining support and Icahn was losing momentum. We think the agreement makes a sale of YHOO or its search business less likely. -S. Kessler

S&P MAINTAINS BUY RECOMMENDATION ON SHARES OF MICROSOFT (MSFT; 25.86):

Yahoo has settled with Carl Icahn in their pending proxy contest. Carl Icahn and, at most, two members from his slate of directors will join the current 8 directors up for reelection and chairman Roy Bostock and CEO Jerry Yang will retain their positions. We believe that a deal for MSFT to acquire YHOO's search business or the entire company will become less likely, and that MSFT will aggressively build its online service business through smaller acquisitions and organic growth, which we think will be a drag on earnings for the next couple of years. -J. Yin

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF SCHERING-PLOUGH (SGP; 19.58):

SGP and Merck (MRK; 36.40) are trading lower this morning after both postponed the release of Q2 results until after the market closes today, pending an update on the SEAS trial. Results from that trial, which studied Vytorin vs. placebo in treating patients with aortic stenosis, will be presented today at 1 pm. While we think the aortic stenosis markets is relatively small vs. cholesterol regulation, we believe fallout from possible negative data will hurt the overall franchise. We will update after SEAS results are released. -H. Saftlas


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