Markets & Finance

S&P Picks and Pans: Citigroup, Nova Chemicals, Reliant Energy, Paychex


Analysts' opinions on stocks in the news Monday

From Standard & Poor's Equity ResearchS&P MAINTAINS HOLD OPINION ON SHARES OF CITIGROUP (C; 1.95):

According to an unconfirmed Wall Street Journal report, Citigroup is in talks with federal officials, which could ultimately give the U.S. government up to a 40% stake in Citi. According to the report, the government may convert a portion of its $45 billion preferred stake in Citi into common shares, which would help boost the company's low tangible equity ratio (currently 1.5%), which we believe is too low given Citi's asset base. We think such a move would be more psychological than tangible, as no real capital would be added to Citi, but it might help ease investors' concerns over the banking space. -S. Plesser

S&P MAINTAINS HOLD OPINION ON SHARES OF NOVA CHEMICALS (NCX; 5.36):

NCX agrees to be acquired by a concern owned by the Emirate of Abu Dhabi for $6.00 a share, a 348% premium to last Friday's closing price, or a total value of $2.3 billion with debt. We suspect NCX was forced to find a buyer due to its difficult financial situation, which included a need to obtain financing to satisfiscal year credit amendments. The buyer will also provide a $250 million credit backup facility. The deal is subject to normal approvals, including by at least two-thirds of shareholders at a meeting expected in April. We boost our target price to $6 from $3 to reflect the terms of the deal. -R. O'Reilly-CFA

S&P UPGRADES OPINION ON SHARES OF RELIANT ENERGY TO HOLD FROM STRONG SELL (RRI; 3.84):

We believe RRI shares are now fairly valued, trading below our target price. While we continue to expect weakness in results, we think the company has sufficient liquidity to continue operating through at least the end of 2009. Management continues to seek a buyer for all or part of RRI, but we think the current environment makes it unlikely that a buyer for the entire company or for its struggling retail business will emerge in the near future. We also fear that a cash infusion could be necessary, diluting the shares. We are keeping our target price at $4. -C. Muir

S&P REITERATES HOLD OPINION ON SHARES OF PAYCHEX INC. (PAYX; 23.73):

We believe PAYX's payroll processing segment is being adversely affected by increasing levels of unemployment, rising bankruptcies by its clients, fewer new businesses coming on line, and a reduced level of checks per client. Accordingly, we are lowering our fiscal year 2009 (May) EPS estimate by $0.05 to $1.51. We are also reducing our fiscal year 2010 EPS estimate by $0.03 to $1.61, as we believe the current issues will linger into late calendar 2009. We are cutting our 12-month target price by $2 to $26, based on a peer-average p-e of 17.4 times our calendar 2009 EPS estimate of $1.49. -D. Cathers


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