Markets & Finance

S&P Picks and Pans: Alcoa, Wal-Mart, Department Stores, Royal Bank of Scotland, MetLife


Analysts' opinions on stocks in the news Wednesday

From Standard & Poor's Equity ResearchS&P DOWNGRADES OPINION ON SHARES OF ALCOA INC. TO SELL FROM BUY (AA; 16.71):

Our opinion change is based on valuation. AA posts third quarter EPS of $0.37, vs. $0.38, before special items in both periods, on a 2.1% sales decline, shy of our $0.55 estimate on higher-than-expected costs. On a less optimistic outlook for the price of aluminum and end-market demand for AA's downstream businesses, we are cutting our 2008 estimate to $1.70 from $2.15, and lowering 2009's to $1.51 from $2.54. We are reducing our 12-month target price to $12 from $26 to reflect our 2009 EPS projection cut, and our expectation for declining free cash flow. -L. Larkin

S&P RAISES RECOMMENDATION ON SHARES OF WAL-MART STORES TO STRONG BUY FROM BUY (WMT; 53.83):

Our upgrade is based on valuation following a recent decline in the shares, now priced significantly below our 12-month target price of $65, reduced today from $67 on updated DCF and p-e analyses. WMT reports September comp-store sales rose 2.4%, missing our 2.9% estimate mostly on negative 0.4% impact from hurricanes. We are trimming our October-quarter EPS estimate by $0.02 to $0.74 reflecting weaker discretionary spending and adverse forex impact on international segment. However, we expect continued EPS growth on marketshare gains as consumers trade down from higher cost competitors. -J. Agnese

DEPARTMENT STORES REPORT FURTHER DETERIORATION IN SALES:

Kohl's (KSS; 39.73) and its peers miss our September same-store sales projections as events in the financial markets took a further toll on consumer confidence and spending levels. J.C. Penney (JCP; 28.09) saw mall traffic fall to its lowest point this year, and Dillard's (DDS; 9.64) also noted hurricane disruption to business in select stores. We expect weak same-store sales in October as we think consumer purchases will remain largely need-based. We think shoppers may find attractive markdowns on fall apparel just in time for a return of cooler temperatures. -J. Asaeda

S&P UPGRADES ADSS OF ROYAL BANK OF SCOTLAND TO HOLD FROM SELL, ON VALUATION (RBS; 1.49):

After U.K. government's announcement of plans to provide capital to U.K. banks, RBS's ADS price fell over 50% on Monday and Tuesday. For the listed banks, the government has offered preference capital, but it will also assist in raising ordinary equity if requested. The government provision of capital will carry terms and conditions reflecting the financial commitment made by the taxpayer. We see this as likely to dilute future returns, but we believe the recent fall in price is likely to have anticipated this dilution and we are keeping our 12-month target price of $2. -D. Chambers

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF METLIFE (MET; 36.87):

MET says it plans an equity raise of roughly $2.8 billion through the sale of 75 million shares. The company said it was adding to its $4 billion in excess capital as a proactive step in this volatile market environment. MET also preannounced third quarter results, now forecasting operating EPS of $0.83-$0.93, compared to our $1.54 estimate, and withdrew full-year 2008 guidance. While we did not foresee the third quarter earnings shortfall or the capital raise, we are maintining our hold opinion on MET due the shares' historically low valuation. We will have additional comments following the conference call this morning. -B. Howlett


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