Markets & Finance

S&P Picks and Pans: Citigroup, Wells Fargo, AIG, Ford, Family Dollar Stores


Analysts' opinions on stocks in the news Friday

From Standard & Poor's Equity ResearchS&P DOWNGRADES SHARES OF CITIGROUP TO HOLD FROM BUY (C; 22.50):

We consider today's agreement for Wells Fargo (WFC; 35.00) to buy Wachovia (WB; 4.00) at a higher price than Citigroup offered to be a setback for Citigroup. We had favored the deal between Citi and WB, particularly because the FDIC backstopped most of downside risk. It also would have expanded Citi's footprint and shored up U.S. deposit funding, an area that has been lacking for C. Though a possible government rescue plan will probably benefit Citi, we are wary of Citi's balance sheet and further consumer deterioration. We cut our target price by $3 to $22, a historically discounted 1.1 times book value of $20.

Update: Citi issues a statement asserting that Wachovia's agreement to a transaction with Wells Fargo is a breach of an exclusivity agreement between C and WB. In addition, it states that WFC's conduct constitutes tortious interference with the exclusivity agreement. To substantiate its position, Citi says it has been providing liquidity support to WB since Monday. Although we do not think the deal between WFC and WB will be reversed, we expect Citi could collect a fee for the breakup of the deal. - S. Plesser

S&P MAINTAINS HOLD OPINION ON SHARES OF WELLS FARGO (WFC; 36.98):

After conference call, we note that WFC plans to mark down Wachovia's loan book by roughly $74 billion, including 26% on WB's $122 billion option-ARM portfolio. Although we think the marks are conservative, there could still be some downside risk. That said, we believe positive synergies exist between the companies, including an expansion of WFC's geographical footprint, and expense cutting. We raise our target price for WFC by $5 to $41, an above-historical 18.3 times our 2009 EPS estimate of $2.24, justified by potential synergies from the pending purchase of WB. -S. Plesser

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF AMERICAN INTERNATIONAL GROUP (AIG; 4.00):

We applaud AIG's decision, announced today, to retain its property/casualty insurance and much of its foreign life operations. We view these as AIG's strongest franchises. We expect AIG to try and sell its airline leasing, U.S. life insurance and consumer finance units. We also note AIG has drawn down $61 billion of its $85 billion Fed-backed loan. We continue to see the execution risk to this strategy as very high, since AIG's loan term is two years and credit market may make financing these deals difficult. Our target price remains $5.50 (one-time estimated book value). -C. Seifert

S&P REITERATES HOLD OPINION ON SHARES OF FORD MOTOR (F; 4.22):

Although we expect the company's planned public offering of up to $500 million worth of its shares to be only modestly dilutive to EPS, we are cutting our financial forecasts based on our outlook for weakening worldwide auto demand through 2009. Reduced credit availability, higher gas prices and a slowing global economy, partly offset by a likely increase in cost cutting, lead us to widen our estimated 2008 loss per share by $0.23 to $2.26 and 2009's by $0.70 to a loss of $1.97. We cut our 12-month target price by $0.50 to $4.50 based on peer comparative price-to-sales ratio. -E. Levy-CFA

S&P RAISES OPINION ON SHARES OF FAMILY DOLLAR TO BUY FROM HOLD (FDO; 25.43):

August-quarter EPS of $0.38 vs. $0.26 beats our $0.35 estimate, reflecting expense controls. We think sales for fiscal year 2009 (August) will remain skewed toward lower-margin consumables. But we expect credit card acceptance to lift average customer transactions and see margin benefits from FDO's inventory and private label initiatives. We also look for it to leverage expenses off the 2% same-store sales gain we project. We lift our fiscal year 2009 EPS estimate by $0.05 to $1.75 and our p-e-based 12-month target price by $1 to $29. We view FDO shares as attractive at current level. -J. Asaeda


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