Markets & Finance

S&P Picks and Pans: Whole Foods, Freddie Mac, Cisco Systems, News Corp., Polo Ralph Lauren


Analysts' opinions on stocks in the news Wednesday

From Standard & Poor's Equity ResearchS&P DOWNGRADES OPINION ON WHOLE FOODS MARKET TO HOLD FROM BUY (WFMI; 18.61):

June-quarter EPS of $0.24, vs. $0.35, misses our $0.36 estimate. Comp-store growth slowed to historically low 2.6%, below our 5.7% view, as traffic growth declined significantly. Gross margins narrowed more than expected on rising food cost inflation and increased promotions. We see negative impact as consumers trade down to lower-priced offerings, both within WFMI's stores and to competitors. We lower our fiscal year 2008 and fiscal year 2009 EPS forecasts by $0.43 and $0.64, to $0.94 and $1.11, and our target price by $21 to $17 on comparative and p-e analyses. -J. Agnese

S&P MAINTAINS SELL OPINION ON SHARES OF FREDDIE MAC (FRE; 6.50):

Shares are down sharply in premarket after FRE posts loss per share of $1.63, vs. EPS of $0.96, wider than our $0.75 loss view. FRE says it will cut its third quarter dividend to $0.05 from $0.25, saving the company more than $500 million per year. The sequential doubling of net interest income was more than offset by credit-related expenses of $2.8 billion and a securities writedown of $1.0 billion. We continue to be troubled by FRE's capital situation. Currently, FRE's core capital is only $2.7 billion in excess of its target capital surplus. We will provide additional details following FRE's 10 am call. -K. Cole-CFA

S&P REITERATES HOLD OPINION ON SHARES OF CISCO SYSTEMS (CSCO; 22.65):

July-quarter EPS of $0.36, vs. $0.34, is above our $0.35 estimate on 10% sales growth and good cost discipline. We see CSCO taking advantage of its well-balanced portfolio and strong cash position to gain market share during the current weak macroeconomic climate. While CSCO sees technology spending picking up in 2009, we remain concerned about poor sales visibility and deteriorating trends in the service provider market. Long-term trends are positive, in our view, due to a continued increase in network bandwidth consumption. On relative analysis, we keep our 12-month target price at $26. -A. Bensinger

S&P MAINTAINS BUY OPINION ON CLASS B SHARES OF NEWS CORP (NWS; 14.52):

Before $0.08 net one-time gains, June-quarter EPS of $0.35, vs. $0.31, beat S&P and Street estimates by $0.01, paced by Film (Chipmunks, Juno), Fox News (FNC), Sky Italia, against mixed results in Print/Publishing, sharp TV drop (network, stations, STAR). We think the shares are down on fiscal year 2009 (June) goal of 4%-6% EBIT growth. Despite growing risks on a weak economy, this seems very cautious vs. fiscal year 2008 mid-teens, with potential upside on MySpace, Sky, FNC renewals, international cable, Dow Jones, vs. adverse film timing, Super Bowl comps. We cut target price by $8 to $18, on PEG, sum-of-the-parts. -T. Amobi - CPA, CFA

S&P RAISES RECOMMENDATION ON SHARES OF POLO RALPH LAUREN TO BUY FROM HOLD (RL; 64.64):

RL beats our $0.73 June-quarter EPS estimate, reporting $0.93 vs. $0.82. Sales met our forecast at $1.1 billion. We expected 300 basis points margin contraction, and RL executed to a 40 basis points squeeze, as better merchandise margins than expected drove operating results. A lower tax rate and 5% fewer shares provided further EPS gains. Our confidence in RL's global strategy has strengthened as the company prunes third tier wholesale accounts and focuses on retail. We are lifting our fiscal year 2009 (March) EPS estimate to $4.20 from $4.00, which compares with $4.00-$4.10 guidance. We reiterate our $80 target price. -M. Driscoll-CFA

S&P MAINTAINS HOLD OPINION ON SHARES OF SPRINT NEXTEL CORP. (S; 8.55):

Sprint reports second quarter EPS, before one-time items, of $0.06 vs. $0.25, $0.03 ahead of our estimate. The company lost 771,000 postpaid subscribers, slightly better than our forecast. Wireless EBITDA was in line with our estimate, while total EBITDA was slightly ahead. However, Sprint issued what we view as somewhat worse-than-expected third quarter guidance and announced it will offer $3 billion in convertible preferred stock. While we believe its second quarter was a step in the right direction, we think the turnaround will still take several quarters. We will provide an update following the 11 a.m. call. -J. Moorman, CFA


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