Markets & Finance

S&P Picks and Pans: Goldman Sachs, Morgan Stanley, AIG, Constellation Energy, CBRL Group, Dell, Owens-Illinois


Analysts' opinions on stocks in the news Tuesday

From Standard & Poor's Equity ResearchS&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF GOLDMAN SACHS (GS; 135.50):

August-quarter EPS of $1.81, vs. $6.13, misses our $2.87 estimate. Revenues came in lower than we expected, as mortgage and loan write-downs totaled about $1.1 billion, and principal, trading and investment banking results declined. However, securities servicing and asset management operations continue to perform. Costs were held largely in line. We are lowering our fiscal year 2008 (November) EPS forecast to $12.08 from $14.85, based on additional write-downs and trading losses expected in the November-quarter, and reducing our target price by $10 to $155, about 1.5 times projected tangible book value, a premium to peers. -M. Albrecht

S&P KEEPS HOLD RECOMMENDATION ON SHARES OF MORGAN STANLEY (MS; 30.36):

We believe the market is punishing MS and rival Goldman Sachs for their reliance on outside funding sources, and think each may be pressured to seek partners with more permanent funding solutions, such as a large deposit base, much like Merrill Lynch (MER; 19.29) has in its pending tie-up with Bank of America (BAC; 28.43). We continue to expect MS to post an August-quarter profit tomorrow, but we are trimming our target price by $15 to $30, in line with its book value, to reflect current market woes. We would hold MS shares at this time, but not add to positions. -M. Albrecht

S&P REITERATES SELL OPINION ON SHARES OF AMERICAN INTERNATIONAL GROUP (AIG; 4.76):

AIG shares are now indicated to open lower (earlier today shares were indicated higher). We still recommend investors sell this stock. We remain concerned AIG won't be able to adequately prevent the downward spiral that currently exists as it seeks to raise cash to meet collateral posting under credit default swap obligations amid credit downgrades. Exacerbating the issue, in our view, is a regulatory environment that isn't structured to be able to effectively aid AIG. We lower our target price to $4 from $8, which assumes shares continue to trade at discounts to historical levels. -C. Seifert

S&P DOWNGRADES OPINION ON SHARES OF CONSTELLATION ENERGY TO HOLD FROM BUY (CEG; 41.58):

The shares are down 13% this morning despite CEG's claim that the Lehman (LEH; $0.23) bankruptcy will not have a major adverse effect. Excluding commitments related to LEH, CEG says it has credit facility commitments of $6.13 billion and excess liquidity of $2.0 billion. It appears that the market has clearly lost confidence in CEG's hedging strategies and its risk management practices. We are lowering our 2008 and 2009 EPS estimates by $0.35 and $0.45 to $5.25 and $5.95, and cutting our 12-month target price by $33 to $46, a discount-to-peers 7.7 times our 2009 estimate. -J. McCann

S&P LOWERS OPINION ON SHARES OF CBRL GROUP TO SELL FROM HOLD (CBRL; 28.99):

July-quarter EPS from continuing operations of $0.91, vs. $1.15, is well below our $0.99 estimate and near low end of reduced guidance on Aug. 1. We hypothesize today's 12% gain in share price reflects short-covering rally on relief results were not even worse. For fiscal year 2009 (July), we see pressure from higher food, labor and maintenance costs, while year/year energy cost comparisons could become favorable by next summer. We lower our fiscal year 2009 EPS estimate by $0.25 to $2.50. We see CBRL's debt/EBITDA ratio of 3.9 times estimated fiscal year 2009 EBITDA as worrisome. We keep our DCF-based target price of $24. -M. Basham

S&P REITERATES HOLD OPINION ON SHARES OF DELL (DELL; 16.21):

DELL reports that global end-user demand is continuing to soften, an extension of a trend it cited in its earnings report on August 28. While we see the company continuing to grow shipments and potentially take marketshare in coming quarters, we project more pressure on pricing and profitability. We are trimming our EPS estimates for fiscal year 2009 (January) to $1.45 from $1.47, and for fiscal year 2010 to $1.70 from $1.80. We lower our 12-month target price to $19 from $26, based on our updated p-e analysis which incorporates a lower target p-e, closer to peer levels. -T. Smith-CFA

S&P MAINTAINS SELL OPINION ON SHARES OF OWENS-ILLINOIS (OI; 28.97):

Shares down 29% this morning after OI cuts its free cash flow forecast, citing weaker demand in U.S. and Europe, inventory controls and weaker foreign currencies. OI announces a $350 million stock buyback plan. We see pricing impacting glass container volume in North America and Western Europe into 2009, as OI focuses on plant realignments. With soft market conditions, we are lowering our EPS estimates by $0.25 to $4.05 for 2008, and $0.20 to $4.55 for 2009. On relative and DCF-based metrics, we apply a below-peer p-e of 6.2 times our 2008 estimate and lower our target price by $13 to $25. -S. Scharf


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