Markets & Finance

S&P Picks and Pans: Apple, Wachovia, Merck, UAL, American Express, UPS


Analysts' opinions on stocks in the news Tuesday

From Standard & Poor's Equity ResearchS&P DOWNGRADES OPINION ON APPLE SHARES TO SELL FROM BUY (AAPL; 166.29):

AAPL reports June-quarter EPS of $1.19, vs. $0.92 (previously stated $0.97), above our $1.11 view. Sales rose 38%, led by 43% growth for core Mac PC products. Gross margin widened quarter-to-quarter to 34.8%, but was narrower than the 36.8% posted a year ago. Further concerning to us was guidance for gross margin of 31.5% for September-quarter and 30% for fiscal year 2009 (September) which, even if understated, indicates a weakening trend. We lower our EPS forecasts to $5.22 from $5.33 for fiscal year 2008, and to $6.00 from $6.60 for fiscal year 2009, and our target price to $140 from $210 for these volatile shares based on our updated p-e analysis. -T. Smith, CFA

S&P UPGRADES SHARES OF WACHOVIA TO SELL FROM STRONG SELL (WB; 14.01):

After WB's conference call, we believe that new CEO Robert Steel has a good handle on existing problems. At the heart of our upgrade is the question of whether WB will ultimately need to raise additional capital and dilute shareholders. While we are not convinced WB won't have to raise capital, we think today's dividend cut and the possible sale of non-core assets will sustain WB over the next quarter. We are lowering our 2008 EPS estimate $6.87 to a loss of $5.26. However, we are raising our target price $4 to $12, roughly 0.85 times tangible book value. -S. Plesser

S&P REDUCES RECOMMENDATION ON SHARES OF MERCK TO SELL FROM HOLD (MRK; 31.63):

Q2 operating EPS of $0.86, vs. 0.82, is $0.02 above our estimate, which we attribute to unexpected tax benefits. Despite a 5% lift from forex, sales fell 1%, with declines in Gardasil, Singulair and Fosamax. MRK suspends 2008 and long-term guidance amid uncertainties related to the recent negative SEAS trial results on the key Vytorin/Zetia joint venture franchise. We believe that with most of its growth drivers impaired, MRK faces a challenging future over the next several years. We lower our target price by $16, to $29, applying a below-peers 9 times our $3.20 EPS forecast for 2008. -H. Saftlas

S&P UPGRADES OPINION ON SHARES OF UAL CORP TO HOLD, FROM SELL (UAUA; 6.35):

Q2 per share operating loss of $1.19, vs. $1.83 EPS, is sharply narrower than our $2.15 loss estimate. UAUA made significant strides in shoring up liquidity in Q2, and we think liquidity is less of a concern. More importantly, oil prices are down some $14 a barrel in the past week, easing cash burn rates likely in Q3. Ongoing capacity cuts, and fare and fee hikes should help airline economics and cash levels. We are raising our 12-month target price to $7 from $3, a ratio of enterprise value to EBITDAR (including aircraft rent) of about 3, below peers, on our 2009 EBITDAR forecast. -J. Corridore

S&P MAINTAINS HOLD OPINION ON SHARES OF AMERICAN EXPRESS (AXP; 40.90):

AXP posts second quarter operating EPS of $0.56, vs. $0.88, $0.25 below our estimate. Results were hurt by deteriorating credit quality, resulting in a $600 million U.S credit reserve and a $136 million charge to reduce securitization income. Notably, credit quality deteriorated throughout all income levels and through different vintage years. As a result, AXP announces an acceleration of expense reduction. We are lowering our 2008 EPS projection by $0.56 to $2.75 and reducing our 12-month target price by $7 to $43, 15.6 times our 2008 EPS forecast, at the low end of AXP's historical range. -S. Plesser

S&P REITERATES HOLD OPINION ON SHARES OF UNITED PARCEL SERVICES (UPS; 59.46):

UPS posts second quarter EPS of $0.85, vs. $1.04, in line with our estimate and reduced guidance. Operating margin was impacted by fuel, weaker demand and a mix shift towards lower-margin products. UPS sees second half 2008 performing modestly better than the first half, but does not see meaningful economic improvement until 2009. Free cash in the first half 2008 remained strong at $3.4 billion. We are trimming our 2008 EPS forecast to $3.68 from $3.75 and 2009's to $4.20 from $4.25. We are keeping our 12-month target price at $70, 19 times our 2008 EPS projection, at the low end of UPS' 5-year historical p-e range. -J. Corridore


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