S&P Picks and Pans: Apple, IndyMac, Red Hat, Adobe

Analyst opinions on stocks making headlines Wednesday

Apple Inc. (AAPL; $132.97)

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

Analyst: Scott Kessler

The upgrade is based on valuation. The shares have fallen some 10% from highs established last week, following June-quarter results that exceeded our forecasts. Although we continue to remain skeptical about near-term prospects for the iPhone, we think Apple will continue to take market share in desktops and notebooks, and succeed with its digital media strategy with iPods and iTunes. Also, given the current economic and market environments, we think companies/stocks with strong brands, sustainable long-term growth prospects, and solid balance sheets, like Apple, should outperform. Our 12-month target price remains $170.

IndyMac Bancorp (IMB; $20.55)

Downgrades to 2 STARS (sell) from 3 STARS (hold)

Analyst: Stuart Plesser

Our downgrade is based on concerns about the magnitude and protraction of the U.S. housing market decline. We believe falling home prices and stagnant sales will necessitate additional writedowns of IndyMac's securities held, higher provisions for loans held from already elevated second quarter levels, and narrower gain-on-sale margin in coming quarters. Although we think IndyMac is well capitalized, a protracted housing slump could result in a dividend cut. We are lowering our 12-month target price by $4 to $18, 7.7 times our 2007 EPS estimate of $2.35 (lowered today from $2.50), below historical levels.

Red Hat (RHT; $20.32)

Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analyst: Jim Yin

The upgrade is based on valuation and follows a decline in the share price to below our 12-month target price, which we are keeping at $22. We remain concerned about slower growth in billings due to increased competition, and a more difficult year-over-year comparison after one year of acquiring JBoss. Additionally, sales of Linux server grew at a slower rate than Windows servers last quarter for the first time in several years. However, we view Red Hat shares as fairly valued at current levels. We are maintaining our EPS estimates for fiscal 2008 (Feb.) and fiscal 2009 at 36 cents and 53 cents, respectively.

Adobe Systems (ADBE; $39.40)

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

Analyst: Zaineb Bokhari

The upgrade is based on valuation. Adobe shares have declined by about 11% since the company reported May-quarter results, and we think they now offer attractive upside to our 12-month target price of $48, which is based on relative and intrinsic valuation. While shares trade at a premium to S&P 500 software peers, the company is at the start of a major product upgrade cycle. We also think Adobe has considerable long-term potential for growth through its small but growing mobile and devices business segment. We are maintaining our EPS estimates of $1.35 for fiscal 2007 (Nov.), and $1.58 for fiscal 2008.

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