Markets & Finance

S&P Picks and Pans: Rio Tinto, A.O. Smith, Electronic Arts, Yahoo, Nortel


Analysts' opinions on stocks in the news Wednesday

From Standard & Poor's Equity ResearchS&P RAISES RECOMMENDATION ON ADSS OF RIO TINTO PLC TO BUY FROM SELL (RTP; 86.46):

The ADSs are up sharply this morning on news RTP plans to cut net debt by $10 billion by the end of 2009 and maintain its dividend at the 2007 level. The company also intends to reduce its workforce by 14,000, its 2009 capital spending to $4 billion from $9 billion, and to sell assets not previously listed for divestment. With these actions, we think RTP can avoid a sale of stock. We still estimate $15.00 earnings per ADS for 2009, and to reflect the expected improvement in RTP's finances, we raise our 12-month target price to $107 from $50. -L. Larkin

S&P DOWNGRADES OPINION ON SHARES OF A.O. SMITH TO HOLD FROM BUY (AOS; 27.58):

AOS lowers guidance, citing an unprecedented decline in global construction and consumer spending, intensified by inventory reductions. We like that AOS is focusing on reducing capex spending, balance sheet leverage and production output in view of current market conditions. We expect AOS to be further impacted by contract pricing lags of cold rolled steel, a major cost in production, although we see this reversing in the first quarter. We are reducing our 2008 EPS estimate by $0.20 to $2.70, 2009's by $0.10 to $2.90, and our 12-month target price by $7 to $31, 10.7 times our 2009 EPS forecast. -A. Compton

S&P REITERATES SELL RECOMMENDATION ON SHARES OF ELECTRONIC ARTS (ERTS; 19.35):

ERTS warns that results for fiscal year 2009 (March) will be significantly below its guidance for $5.0-$5.3 billion of non-GAAP revenue and non-GAAP EPS of $1.00-$1.40. The company blamed the shortfalls on a polarization in consumer buying patterns, in which they continue to buy top-selling games, but fewer catalog titles. Sales were hurt by major retailers reducing their inventories. We believe ERTS lacks must-buy franchises and we expect the company to cut R&D for a number of poor-selling games to improve profitability. We keep our below-guidance estimates and our target price of $15. -J. Yin

S&P REITERATES BUY OPINION ON SHARES OF YAHOO (YHOO; 12.44):

We think a number of factors are contributing to the stock's price rise this morning. Most notably, in our view, is a letter just released by a 1.5% investor pushing YHOO to salvage a search deal with Microsoft (MSFT; 21.00). In addition, Dow Jones' All Things Digital has recently posted unconfirmed reports that some 1,500 layoffs will start today and that YHOO is getting closer to choosing a new CEO. We still believe YHOO's near-term fundamentals are severely challenged, but that the stock is an attractive value, with notable assets and multiple potential positive catalysts. -S. Kessler

S&P MAINTAINS HOLD OPINION ON SHARES OF NORTEL NETWORKS (NT; 0.41):

According to the Wall Street Journal, NT sought legal counsel regarding bankruptcy protection if restructuring actions fail. While cash stood at $2.7 billion as of the third quarter, NT is saddled with long-term debt of $4.5 billion. We note that no significant debt obligations are due until 2011, and that there are no specific maintenance covenants associated with the debt. NT targets $400 million savings from restructuring and plans to sell certain assets. However, with our forecast for $1 billion in negative cash flow and $1.5 billion in working capital requirements for 2009, NT has little buffer room to fund operations. -A. Bensinger


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