S&P Picks and Pans: IBM, Qwest, Merrill Lynch, Nucor

Analyst opinions on stocks making headlines Monday

IBM Corp. (IBM; $103.37)

Maintains 5 STARS (strong buy)

Analysts: Dylan Cathers, Zaineb Bokhari

IBM announces a cash tender offer for Sweden-based Telelogic AB, a provider of software development tools, for SEK 21 per share, or $745 million, subject to conditions and approvals. We think Telelogic would be a good fit within IBM's Rational Software division. Telelogic had 2006 revenues of about $208 million, up 20% from 2005. We note that in a press release issued this morning, Telelogic's board recommended IBM's offer, but indicated that this could change if a third party were to make a higher bid. Telelogic's shares have risen recently on takeover speculation.

Qwest Communications (Q; $10.15)

Reiterates 2 STARS (sell)

Analyst: Todd Rosenbluth

Qwest CEO Dick Notebart announces plans to step down from the telecom carrier's leadership once a replacement can be found. We view the news as surprising and as a negative for the company, given the improvements in its EBITDA margin and strong stock performance since Notebart became CEO in 2002. With the added retirement of its CFO and E-VP of operations in 2007, we believe Qwest will look outside the company for its new CEO. We contend that the new CEO will face challenges to increasing revenues and operating income, given competition. We view Qwest shares as overvalued relative to peers.

Merrill Lynch (MER; $88.50)

Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: Matthew Albrecht

Recent market trends, including a record volume of M&A deals and strong equity markets, support our forecast of 10% earnings growth in 2007 for Merrill. We still look for 13% growth in net revenues, supported by strong growth in Merrill's capital markets businesses, as well as increased productivity from its financial advisor network. We see a slightly higher compensation rate, in addition to expenses related to global expansion, pinching the pretax margin. We are raising our 12-month target price by $9 to $101, 12 times our 2007 EPS estimate of $8.44, a slight premium to peers.

Nucor Corp. (NUE; $63.15)

Reiterates 3 STARS (hold)

Analyst: Leo Larkin

Shares of the nation's largest minimill were down in early trading June 11 after Nucor's pre-announcement for second quarter EPS of $1.05-$1.15, well below our $1.46 estimate and second quarter 2006's $1.45. The company cited lower shipments in its bar mill division, and noted that a recent attempt to hike sheet prices failed. Based on this less optimistic outlook, we are reducing our 2007 EPS estimate to $5.25 from $5.78, and 2008's to $5.70 from $5.95. Given our revised EPS estimate for 2007, we are lowering our p-e-based 12-month target price to $63 from $67.

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