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S&P Picks and Pans: Merrill, Google, Office Depot, Verizon


Analyst opinions on stocks making headlines Monday

S&P REITERATES BUY RECOMMENDATION ON SHARES OF MERRILL LYNCH

From Standard & Poor's Equity Research

MER; $66.09

An unconfirmed story in the Wall Street Journal states that CEO E. Stanley O'Neal is going to leave as head of the beleagured brokerage. We believe a potential replacement would likely come from outside the firm, in the form of a candidate with a sterling reputation and strong risk management skills. However, an internal candidate may be chosen in order to promote a smooth transition and retain talent, but we think that person would likely come from a department unrelated to recent losses at the firm. We continue to think these shares are undervalued at their current price. /M. Albrecht

S&P REITERATES HOLD OPINION ON SHARES OF GOOGLE INC.

GOOG; $674.60

Online video service Hulu.com launches in beta, and we view it a notable new entrant in a niche increasingly dominated by Google's YouTube. Hulu is a joint venture of News Corp. (NWS) and NBC Universal unit of GE (GE), and has considerable distribution. We perused Hulu.com, and found it easy to navigate and fast, and the proprietary content, largely from News Corp., NBC Universal, and related entities, pretty extensive. While we think the lack of user-generated content is a negative, we see potential with shorter-length clips, and possible portability to devices and TVs. /S. Kessler

S&P DOWNGRADES SHARES OF OFFICE DEPOT TO HOLD FROM BUY

ODP; $16.90

The company is delaying release of Q3 results due to a review related to the timing and recognition of vendor program funds. The magnitude that this issue may have on future earnings and on potential restatements of previous results is unclear. With Office Depot already facing a challenging business environment due to its large exposure to California and Florida markets, we would not add to positions. We are lowering our discounted cash-flow-based target price to $22 from $32, given our assessment that the shares warrant a higher equity risk premium. /M. Souers

S&P MAINTAINS HOLD OPINION ON VERIZON COMMUNICATIONS SHARES

VZ; $45.60

Verizon posts third quarter operating EPS of 63 cents vs. 55 cents, above our 60 cents estimate, aided by lower taxes. Revenues were in line with our projection, as wireline was stronger than expected even with continued access line losses. Wireless matched our revenue projection, as data services comprised 20% of service revenues and Verizon added 1.6 million net subscribers. Overall EBITDA margin was fractionally lower on network costs related to Verizon's fiber offering, which we believe is having success even as it increases capex. We will provide an update following morning call. /T. Rosenbluth

S&P MAINTAINS BUY OPINION ON SHARES OF DOMINION RESOURCES

D; $88.64

Dominion announces an 11% dividend hike to an annual $3.16 per share from $2.84. Also, it set a 2-for-1 stock split. Dominion said it is targeting a long term payout ratio of 55%, which it expects to achieve in 2010, given similarly sized dividend hikes over the next 2 years. This implies that Dominion expects 2010 EPS of about $7.10 a share or an EPS growth rate of about 8.9%, based on our 2007 estimate. We expect this growth to be driven partly by continued share repurchases. We like Dominion's new less risky structure and its plan to increase its dividend. All per-share amounts are pre-split. /C. Muir

S&P REITERATES BUY RECOMMENDATION ON SHARES OF HOST HOTELS & RESORTS

HST; $22.37

Host announces the resignation of President and CEO Christopher J. Nassetta and the immediate appointment of current CFO W. Edward Walter as the new President and CEO. Walter joined Host in 1996 and has been CFO since 2003. While the resignation of Nassetta, who will join Hilton Hotels Corp. as its CEO, comes as a surprise to us, we do not believe it will have a material impact on Host's ongoing operations. We continue to believe Host is positioned to outperform its peers with its luxury and upper-upscale portfolio, urban and resort assets, and international exposure. /J. Willey


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