Markets & Finance

S&P Picks and Pans: Merrill, BofA, Goldman, Citi, GE, AIG


Analyst opinions on stocks making headlines in Monday's market

From Standard & Poor's Equity ResearchS&P KEEPS HOLD RECOMMENDATION ON SHARES OF MERRILL LYNCH

MER; $17.05

MER agrees to be acquired by Bank of America for 0.8595 BofA share per Merrill share, pending necessary approvals. We think Merrill management did a deal at this time because it saw how quickly its peers deteriorated, and it wanted to retain some shareholder value through dealing from a position of strength. Considering the environment, the long-term funding source that BofA provides is likely attractive to Merrill management. We think the deal provides shareholder value in a time of significant uncertainty. Our target price remains $28, a premium to tangible book value. /M. Albrecht

S&P MAINTAINS SELL OPINION ON SHARES OF BANK OF AMERICA

BAC; $33.74

BofA agrees to buy Merrill Lynch for $50 billion in an all-stock deal, subject to necessary approvals. At 1.8 times tangible book value, the purchase price values Merrill at a roughly 70% premium over Fri.'s close. We believe Merrill, with its large force of retail brokers and its international presence, is a good fit for BofA. But we are a bit surprised by the deal price, given that securities markdowns will likely be significant. We also note that the Merrill purchase comes shortly on the heels of BofA's acquisiton of Countrywide and significantly adds to its risk profile, in our view. /S. Plesser

S&P LOWERS RECOMMENDATION ON GOLDMAN SACHS TO HOLD FROM BUY

GS; $147.79

Following a weekend that saw one peer acquired and another approach bankruptcy, we are more cautious on shares of Goldman. We continue to believe it has performed better than peers through sound risk management and prudent executive decisions, but we also think the crisis of confidence within its industry has failed to separate good performers from bad. We expect continued uncertainty surrounding the company and the industry to weigh on the shares. We are reducing our 12-month target price by $30 to $165, about 1.7 times projected tangible book value, a premium multiple to peers. /M. Albrecht

S&P MAINTAINS HOLD OPINION ON SHARES OF CITIGROUP

C; $17.02

After viewing Lehman Brothers' voluntary bankruptcy petition, we note that Citi is listed as a significant holder of Lehman's unsecured senior debt. However, we note that some of this exposure is probably as a trustee on behalf of clients and that it is too early to determine the ultimate payout of this debt, which hinges on asset sales. Separately, based on the sale price of Lehman's securities, we think that Citi will have to take further write-downs on its securities. Citi's large holding of non-core assets though, could obviate a capital raise. /S. Plesser

S&P MAINTAINS BUY OPINION ON SHARES OF GENERAL ELECTRIC

GE; $24.43

Shares are down sharply this morning, as financial stocks are being sold due to the failure of Lehman Bothers and the acquisition of Merrill Lynch by BofA. We think the sell-off represents panic by investors and we still see the asset quality of GE's financial portfolio as stable. GE issued a press release last night with data on its financial services businesses. The majority of GE's real estate assets, particularly its residential mortgages, are outside of the U.S., we think its loan-to-value ratio is strong and we do not see GE in need of external capital. We see GE as a conservative and well financed lender. /R. Tortoriello

S&P DROPS ANALYTICAL COVERAGE ON SHARES OF LEHMAN BROTHERS

LEH; $3.65

We are dropping analytical coverage of Lehman Brothers, an investment bank, because a Chapter 11 bankruptcy filing is imminent. The company said that customers of its broker-dealer and Neuberger Berman subsidiaries can continue to do business with Lehman, though it will likely sell both operations as part of the liquidation. Our last recommendation on the shares was hold. /M. Albrecht

S&P DOWNGRADES OPINION ON SHARES OF AMERICAN INTERNATIONAL GROUP TO SELL FROM HOLD

AIG; 12.14

Unconfirmed reports by Reuters and other media say AIG is scrambling to raise some $40 billion in additional capital to stave off a downgrade to its financial strength ratings that could, in turn, lead to greater downturn in AIG's fortunes. We believe ILFC, AIG's airline leasing unit, is probably the most likely asset to be sold. We are not overly sanguine that AIG will be able to fully resolve its mortgage issues. We lower our 12-month target price to $8 from $20, which assumes AIG shares trade at a deeper discount to book value. Above our target price, we would sell. /C. Seifert

S&P KEEPS NEGATIVE OUTLOOK FOR INVESTMENT BANKING & BROKRERAGE SUB-INDUSTRY

Following a tumultuous weekend that saw Merrill Lynch agree to be acquired and Lehman Brothers plan for a bankruptcy filing, we expect continued pressure on the group. We think balance sheet woes and a deteriorating operating environment will continue to pressure the bulge-bracket firms, while the economic slowdown will continue to pressure results at some of the smaller firms. We believe consolidation within the group will continue, as companies seek greater economies of scale in core operations and long-term funding bases. /M. Albrecht


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