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S&P Picks and Pans: Citigroup, Banc of America, Oracle, Palm, Verasun


Analysts' opinions on stocks in the news Friday

From Standard & Poor's Equity ResearchS&P UPGRADES SHARES OF CITIGROUP TO BUY FROM HOLD (C; 20.42):

Our upgrade is based on a combination of today's news of a temporary ban on financial short selling and the likelihood that the U.S. government will put together a plan that would take bad assets off the balance sheets of financial companies. Such a plan, if passed, could alleviate the decline of securities prices and may stave off a significant decline in home prices. We think this should help Citigroup's balance sheet, which holds a significant amount of distressed assets. We are increasing our 12-month target price by $5 to $25, a below historical 1.25 times book value of $20. -S. Plesser

S&P UPGRADES OPINION ON SHARES OF BANK OF AMERICA TO BUY FROM SELL (BAC; 37.10):

Our upgrade is based on a combination of today's news of a temporary ban on financial short selling and the likelihood the government will put together a plan that would take bad assets off the balance sheets of financial firms. Such a plan, if passed, could reduce the downside to securities prices and may stave off a significant decline in home prices. We think BAC, with its large exposure to the U.S. home market, will be a major beneficiary of such a proposal. We are increasing our target price $19 to $45, 13.4 times our 2009 EPS estimate of $3.37, which is above historical levels. -S. Plesser

S&P MAINTAINS STRONG BUY RECOMMENDATION ON SHARES OF ORACLE CORP. (ORCL; 18.75):

August-quarter operating EPS of $0.28, vs. $0.21, is $0.02 above our estimate. Sales rose 18% to $5.42 billion, below our $5.45 billion view. New licenses rose 14% to $1.24 billion, $8 million below our outlook. Application licenses fell 12%, on tough comps, while database and middleware licenses rose 27%, helped by $84 million contribution from BEA. Operating margins widened notably, and we think ORCL performed well in a seasonally slow quarter. We continue to expect ORCL to grow faster than peers. We raise our fiscal year 2009 (May) EPS estimate $0.02 to $1.49 and initiate our fiscal year 2010 view at $1.71. We maintain our $25 target price. -Z. Bokhari

S&P REITERATES SELL OPINION ON SHARES OF PALM INC (PALM; 8.49):

PALM posts August-quarter loss of $0.31, vs. EPS of $0.06, wider than our $0.25 loss estimate. Revenues came in much better than expected at $44.7 million ahead of our estimate on strong smartphone sales of 1 million units. However, gross margin of 26.5% was below our estimate of 27.5%, as we believe the strong sale of Centros weighed on margins. We think that sell through of the popular Centro is starting to slow and PALM will have to replace it with new products. Management stated it expects revenues in November-quarter to be down sequentially. We keep our 12-month price-to-sales-based target price of $6.50. -T. Rosenbluth, J. Moorman, CFA

S&P DOWNGRADES OPINION ON SHARES OF VERASUN TO SELL FROM HOLD (VSE; 1.90):

This week VSE announced it expected a third quarter net loss of $0.40-$0.65 per share related to unsuccessful hedging. As a result, VSE's liquidity has declined and it was attempting to raise funds by selling 20 million shares of common stock, but VSE suspended this offering this morning and is exploring other alternatives. We are cutting our 2008 EPS estimate by $0.84 to a $0.36 loss, 2009's by $0.81 to $0.06 EPS, and 2010's by $0.25 to $0.70 EPS. Blending our DCF and relative valuations, we are cutting our target by $7 to $1, an expected enterprise value of 13.7 times our 2009 EBITDA estimate. -T. Vital


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