Markets & Finance

S&P Picks and Pans: Dell, Microsoft, PetSmart, Marvell Technology, Huaneng Power


Analysts' opinions on stocks in the news Friday

From Standard & Poor's Equity ResearchS&P DOWNGRADES RECOMMENDATION ON SHARES OF DELL TO HOLD FROM BUY (DELL; 25.21):

DELL posts July-quarter EPS of $0.31, vs. $0.33, below our $0.38 estimate. Revenues rose 11%, led by strong laptop PC sales. Gross margin narrowed sharply on pricing pressure and business realignment costs. Despite lower SG&A expenses, net margin dropped to 3.7% from 5.0%. We believe unsteady margin patterns are likely to continue into fiscal year 2010 (January) and we are taking a less aggressive stance. We are lowering our EPS forecasts to $1.47 from $1.58 for fiscal year 2009, and to $1.80 from $1.85 for fiscal year 2010, and reducing our 12-month target price to $26 from $28 based on our revised forward p-e analysis. -T. Smith, CFA

S&P MAINTAINS BUY RECOMMENDATION ON SHARES OF MICROSOFT (MSFT; 27.49):

MSFT has agreed to acquire Greenfield Online (SRVY; 17.34) for $486 million in cash ($17.50 per SRVY share), subject to approvals. We view as positive the proposed acquisition of this provider of online comparison shopping, following recent MSFT acquisition of air fare info provider Farecast. We think SRVY purchase would strengthen MSFT's online platform and is consistent with strategy of simplifying tasks related to online transactions. We see long-term benefits of increased investment, but project losses in MSFT's online service business for the next couple of years. -J. Yin

S&P LOWERS RECOMMENDATION ON SHARES OF PETSMART TO BUY FROM STRONG BUY (PETM; 26.82):

Our downgrade reflects a nearly 10% rise today, following strong July-quarter results. We continue to view PETM shares favorably over both near and long term, but they are now trading at 15.3 times our fiscal year 2010 (January) EPS estimate of $1.75, and we view further upside as more limited. The company continues to produce strong free cash flow despite challenging economic conditions, and we note a balance sheet that carries a modest net cash position. Our 12-month, DCF-based target price remains $30, 17 times our fiscal year 2010 EPS projection. Trading at a PEG under 1.1 times, we continue to find PETM attractive. -M. Souers

S&P REITERATES HOLD OPINION ON SHARES OF MARVELL TECHNOLOGY GROUP (MRVL; 14.17):

MRVL reports July-quarter operating EPS of $0.17, vs. a loss of $0.03, above our $0.13 estimate. The upside reflects revenue growth of 28% and gross margin of 52%, both better than our forecasts. While we expect revenue growth above industry peers, we remain concerned about notable execution and macroeconomic weakness. We are increasing our fiscal year 2009 (January) operating EPS projection by $0.10 to $0.66 on our outlook for strong gross margin improvement. However, we are lowering our target price by $4 to $16 on a peer-premium p-e of 22 times on our fiscal year 2010 operating EPS forecast of $0.72. -R. Khalid, CFA

S&P DOWNGRADES ADSS OF HUANENG POWER INTERNATIONAL TO STRONG SELL FROM BUY (HNP; 29.89):

We were disappointed by HNP's performance in the first half of 2008, as unit coal costs rose 34%, higher than previously indicated, even though HNP had contracted 80% of its needs earlier this year. Given our expectation of a more than 80% increase in assumed coal costs for 2008-2010, we lower our 2008 earnings per ADS estimate to $0.31 from $1.74 and 2009's to $0.15 from $2.87. We are also cutting our 12-month target price by $12 to $26, valuing HNP at its replacement value, which we believe will provide fundamental support. -L. Tan


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