Markets & Finance

S&P Stock Picks and Pans: Dow Chemical, Bank of America, Toyota, Safeway, Logitech, Lab Corp.


Analysts' opinions on stocks in the news Tuesday

From Standard & Poor's Equity ResearchS&P RAISES RECOMMENDATION ON SHARES OF DOW CHEMICAL TO HOLD FROM SELL (DOW; 15.90):

Shares have fallen below our $16 target price, following the cancellation last week of the pending joint venture with Kuwait on DOW's ethylene chain products, under which DOW was to get $9 billion. DOW will discuss with others a similar venture and repeats its commitment to its dividend, which yields nearly 11%. The failure of the Kuwait deal created doubt about DOW's pending purchase of Rohm & Haas (ROH; 62.35) since DOW planned to use the proceeds to fund a part of the purchase price. We believe DOW wants to go ahead with the ROH deal, although we think it may seek a lower price. -R. O'Reilly-CFA

S&P MAINTAINS SELL OPINION ON SHARES OF BANK OF AMERICA (BAC; 14.28):

According to an unconfirmed Wall Street Journal report, Robert McCann, the brokerage chief at Merrill Lynch (which was acquired by BAC earlier this year), is leaving the securities firm. This departure would gives us cause for concern regarding a possible clash of cultures between BAC and Merrill, particularly considering that BAC is a more cost-conscious company. In our view, Merrill's brokerage unit was likely the main attraction for BAC in completing the acquisition, and if brokerage attrition picks up, the acquisition becomes less valuable. -S. Plesser

S&P REITERATES SELL OPINION ON ADSS OF TOYOTA MOTORS (TM; 65.62 ):

Based on an unconfirmed Dow Jones report, shrinking global vehicle demand appears to be taking its toll on TM as it plans an additional combined 11 days reduction in vehicle production in Japan during the first quarter. We expect U.S. industry light vehicle sales to decline in the low double-digit range in 2009 and JD Power & Associates (an entity owned by the McGraw-Hill Companies that operates independently of S&P), forecasts a 7% decline in global light vehicles sales for the year. With TM's worldwide operations, we believe TM's performance will succumb to lower demand. -E. Levy-CFA

S&P REDUCES RECOMMENDATION ON SHARES OF SAFEWAY INC TO HOLD FROM BUY (SWY; 22.99):

Our downgrade is based on valuation as the shares approach our 12-month target price of $26, based on comparative and forward 12-month p-e analysis. We continue to expect SWY to benefit in 2009 as consumers, in an adverse economic environment, trade down to food retailers from foodservice operators. Despite a more aggressive pricing strategy, we expect margins to widen in 2009 on increased demand for generic drugs and private label goods and SWY's cost reduction efforts. We are maintaining our 2008 and 2009 EPS estimates of $2.25 and $2.40. -J. Agnese

S&P REITERATES HOLD OPINION ON SHARES OF LOGITECH INTERNATIONAL (LOGI; 16.11):

LOGI announces renewed cost-reduction efforts, including a 15% cut in its global workforce, in response to deteriorating consumer demand conditions. The company withdrew its fiscal year 2009 sales and operating income guidance. LOGI expects a charge for March-quarter, sees savings from restructuring beginning in June-quarter, and plans to discuss details along with December-quarter results on Jan. 20. We are lowering our EPS estimates, before restructuring charges, to $1.35 from $1.45 for fiscal year 2009, and to $1.55 from $1.75 for fiscal year 2010. We are also reducing our 12-month target price to $17 from $18. -T. Smith-CFA

S&P MAINTAINS BUY OPINION ON SHARES OF LABORATORY CORPORATION OF AMERICA (LH; 62.25):

LH reaffirms guidance for 2008 sales growth of 11% and adjusted EPS of $4.57-$4.61 but lowers 2009 forecasts to 2%-4% growth from 3.5%-5.5%, and to $4.75-$4.95 from $5.00-$5.25, based on economic conditions. We think high unemployment will delay some doctor visits, but we believe LH will be able to maintain EBITDA margins of 24%-25% on cost cuts and leverage. On balance, we trim our 2009 EPS estimate by $0.31 to $4.84. LH shares, now at 12.9 times that estimate, are well below historical levels, and remain attractive in our view. We lower our target price by $8 to $76 on 1.3 PEG ratio. -J. Loo-CFA


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