Markets & Finance

S&P Picks and Pans: Wachovia, Abercrombie & Fitch, BJ's Wholesale, Wal-Mart, Diamond Offshore


Analyst' opinions on stocks in the news Friday

From Standard & Poor's Equity ResearchS&P DOWNGRADES SHARES OF WACHOVIA TO STRONG SELL FROM SELL (WB; 14.67):

After further review of Q2 earnings, we have grown more pessimistic regarding some of the reserve assumptions that WB is using to calculate potential losses in its $120 billion Option-ARM portfolio. Using a peak to trough decline assumption in home prices of 20.8%, WB believes that the cumulative loss rate will total 12%. We think home prices will decline over 25% and that Option-ARM losses will top 15%. Accordingly, we are reducing our target price by $1 to $11, a below-historical 0.87 tangible book value. Also, an additional capital raise cannot be ruled out. -S. Plesser

S&P REITERATES STRONG BUY RECOMMENDATION ON SHARES OF ABERCROMBIE & FITCH (ANF; 56.09):

CFO Mike Kramer is leaving ANF for a CEO position at Kellwood private equity firm. While we think Kramer did a great job communicating the ANF story, CEO Mike Jeffries remains firmly at the helm in terms of corporate strategy and brand management. We see the A&F brand evolving into a global casual luxury brand over next five years, capitalizing on strong international demand. The newest brand, Gilly Hicks provides ample domestic growth potential by providing intimates for the A&F girl in a differentiated setting. We regard today's sell-off as an improved buying opportunity. -M. Driscoll, CFA

S&P REITERATES BUY RECOMMENDATION ON SHARES OF BJ'S WHOLESALE CLUB (BJ; 36.24):

We cutting our 12-month target price by $5 to $41, on updated comparative and forward p-e analysis. We reduce our July-quarter and fiscal year 2009 (January) EPS estimates by $0.02 and $0.04, respectively, to $0.55 and $2.11, as we take a more cautious view of retail gasoline margins following profit warning from Costco (COST; 63.18). However, we continue to believe BJ is better positioned than peers in adverse economic environment, with its low-cost operating structure compared to traditional food competitors, easing sales comparisons, and benefits we see from merchandising initiatives. -J. Agnese

S&P REITERATES BUY RECOMMENDATION ON SHARES OF WAL-MART STORES (WMT; 56.97):

We continue to believe WMT is well positioned to benefit as consumers trade down to low-priced supercenter offerings and take advantage of its one-stop shopping convenience, despite recent profit warning from warehouse club operator Costco (COST; 62.26). We see July comp-store sales growing 4.0%, above two-year average of 2.2%, on benefits we see from favorable traffic trends and mailings of stimulus checks. We keep our July-quarter and fiscal year 2009 (January) EPS estimates of $0.83 and $3.48, respectively, and our target price of $64, based on our comparative and forward p-e analyses. -J. Agnese

S&P UPGRADES OPINION ON SHARES OF DIAMOND OFFSHORE TO BUY FROM HOLD (DO; 115.91):

Q2 EPS of $2.99, vs. $1.81, is $0.37 ahead of our estimate. Results were led by improved dayrates, although we attribute much of the earnings beat to better-than-expected utilization and lower-than-expected contract drilling opex, due to pushback on survey downtime for four rigs into the second half of 2008. Still, we think new letters of intent for four floater rigs yield attractive dayrates, and view demand for DO's floaters as strong. We are raising our 2008 EPS forecast $0.05 to $10.87, but trimming 2009's $0.02 to $12.90. On relative metrics, we keep our 12-month target price of $136. -S. Glickman


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