Markets & Finance

S&P Picks and Pans: Microsoft, Home Depot, News Corp., AIG, Macy's, Marvel Entertainment, Medco


Analysts' opinions on stocks in the news Tuesday

From Standard & Poor's Equity ResearchS&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF MICROSOFT (MSFT; 16.99):

CEO Ballmer said at an analyst meeting that conditions remain difficult and sales will be impacted by deteriorating PC demand and lower IT spending. He also expects online ad revenue to be pressured. MSFT has cut $1.5 billion in expenses and $0.7 billion in capex, but plans to gain marketshare in a difficult economy. He is hopeful about early reviews of Windows 7, but provided no release date. We believe MSFT faces an uphill battle in several markets including online search and smartphones. Despite these challenges, we take positive note of MSFT's strong balance sheet and operating cash flow. -J. Yin

S&P REITERATES HOLD RECOMMENDATION ON SHARES OF HOME DEPOT (HD; 20.20):

Excluding one-time items, January-quarter EPS of $0.19, vs. $0.40, is $0.05 higher than our estimate. While comp-store sales declined 13%, slightly worse than our 11% projection, we think HD did an excellent job in managing gross margins amid a challenging environment. We expect deteriorating consumer spending and housing data in 2009, and are lowering our fiscal year 2010 (January) EPS estimate to $1.24 from $1.34. We set fiscal year 2011 at $1.37, and trim our DCF-based target price by $2 to $22. We favor HD's strong free cash flow generation, but think shares are fairly valued at 16 times our fiscal year 2010 EPS estimate. -M. Souers

S&P MAINTAINS HOLD OPINION ON CLASS B SHARES OF NEWS CORP (NWS; 6.39):

Unconfirmed WSJ report says NWS COO Peter Chernin plans to leave NWS on June 30 to pursue entrepreneurial ventures/personal projects. While it's somewhat surprising, the news isn't entirely unexpected amid speculations on Chernin's contract talks, which CEO Rupert Murdoch just months ago said were "constructive" and "friendly." A 20-year NWS veteran, and one of industry's highly-regarded execs, Chernin's exit couldn't have been more ill-timed, with fiscal year 2009 (June) shaping up as the worst yet in NWS's 50-year history. News should rekindle succession concerns around NWS's septuagenarian founder/CEO. -T. Amobi - CPA, CFA

S&P MAINTAINS HOLD OPINION ON SHARES OF AMERICAN INTERNATIONAL GROUP (AIG; .46):

AIG confirmed it was in talks with the U.S. government to get additional funds. AIG has already received $150 billion of aid late last year. While we believe the dilution from the expected conversion of the N.Y. Fed's 79.9% interest in AIG may already be priced into the shares, we think additional dilution is likely. We are cutting our target price to $0.50, our lowest available target price, from $1.50. We reiterate our view that AIG's planned asset sales, including an unconfirmed Bloomberg story that says MetLife (MET; $20.3; hold) is interested in a life unit, may not be enough to repay government loans. -C. Seifert

S&P MAINTAINS HOLD OPINION ON SHARES OF MACY'S, INC. (M; 7.62):

With lower SG&A expenses than we expected, Macy's posts January-quarter operating EPS of $1.06, vs. $1.65, $0.04 higher than our estimate. By taking aggressive clearance markdowns during the quarter, the company ended fiscal year 2009 (January) with comparable-store inventories down 7.4%, which is encouraging. While we see less markdown risk for Macy's this spring, we expect that sales will likely remain promotionally driven. The company reiterates its fiscal year 2010 guidance of a same-store sales decrease of 6%-8% and operating EPS of $0.40-$0.55. We will update after Macy's conference call this morning. -J. Asaeda

S&P MAINTAINS HOLD OPINION ON SHARES OF MARVEL ENTERTAINMENT (MVL; 27.05):

MVL reports fourth quarter EPS of $0.80, vs. $0.35, ahead of our $0.70 estimate as sales related to the DVD release of Iron Man helped to drive film segment sales to $155 million and Spiderman licensing revenue held up better than we expected. We think MVL's first year of in-house film production was quite successful, but with no releases scheduled before May 2010, we don't see any major near-term catalysts beyond licensing revenues stemming from FOX's release of Wolverine this May. We maintain our 2009 EPS estimate of $1.20 and our 12-month target price of $30. -E. Kolb

S&P REITERATES BUY OPINION ON SHARES OF MEDCO HEALTH SOLUTIONS (MHS; 45.99):

Fourth quarter operating EPS of $0.59, vs. $0.43, meets our estimate. Revenues rose 14%, mostly on new client wins and branded drug price inflation, partly offset by a rise in lower-cost generic drug volumes. We are encouraged by 96.4% retention rate and $6.1 billion in net new business gained so far in 2009. We also like 25% rise in EBITDA per adjusted script, but we see slower 2009 growth, since most new accounts have low mail penetration rates. We view over $2 billion in operating cash flow seen for 2009 as providing financial flexibility. We keep our 2009 EPS estimate of $2.77 and our $55 target price. -P. Seligman


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