S&P Stock Picks and Pans: Lehman Brothers, Mattel, Starbucks, Electronic Arts

Analysts' opinions on stocks in the news

Lehman Brothers (LEH; $61.09)

Downgrade to sell from hold

Analyst: Matthew Albrecht

After taking a closer look at the company's balance sheet, we believe Lehman Brothers may be forced to write down a larger portion of its mortgage-related positions given recent market trends, although we note hedging positions may mitigate some losses. We are also concerned with the rising amount of high-yield bridge loan commitments outstanding that it may be forced to extend, as well as a deteriorating M&A environment. We are keeping our fiscal year 2007 (November) EPS estimate at $8.08, but our target price declines $15 to $55, which at 1.5 times book value is a discount to peers.

Mattel (MAT; $23.66)

Maintain hold opinion

Analyst: Erik Kolb

Mattel announces that it will recall 83 types of Fisher-Price brand toys because of paint pigment containing lead. The recall involves about 967,000 plastic preschool toys produced by a Chinese manufacturer. Mattel will adjust already-reported second quarter pretax profits by $30 million. The company continues to investigate the issue, and although there have been no specific reports of affected children, we are concerned about the litigation risk. We are lowering our 2007 EPS estimate to $1.60 from $1.64, and our 12-month target price falls to $27 from $29 on updated historical analysis.

Starbucks (SBUX; $27.75)

Maintains buy recommendation

Analyst: Mark Basham

June-quarter EPS of $0.21, vs. $0.18, is below our $0.23 estimate. Cost of sales rose 169 basis points on new warm food items, higher rent expense at new stores, and higher dairy costs. However, we believe effect of dairy has been overstated by analysts, and think rent and new menu items are more significant. Traffic rose 1%, and new items contributed to 3% rise in average transaction, yielding 4% comp-store sales gain. We think key issue ahead is effect of a 3% price rise on traffic. We cut fiscal year 2007 (September) estimate by $0.02 to $0.88, and fiscal year 2008's by $0.05 to $1.05. Our 12-month target price remains $40.

Bare Escentuals (BARE; $23.21)

Upgrade to buy from hold

Analyst: Loran Braverman, CFA

BARE posts second quarter EPS of $0.22, vs. $0.17, in line with our estimate. Sales grew 29%, beating our 25% forecast. However, the largest segment, infomercials, disappointed with a flat comparison. We attribute this to a more price-sensitive customer base and to some specific BARE infomercial issues. Our full 2007 EPS estimate remains $0.93. Due to reduced peer multiples and our growing concern over competition, we are lowering our p-e-based 12-month target price by $8 to $31. With the stock off sharply this morning, our buy opinion is based on valuation.

Electronic Arts (ERTS; $51.03

Maintain sell recommendation

Analyst: J.Yin

ERTS posts June-quarter operating loss per share of $0.25, vs. loss of $0.20, $0.10 narrower than our loss estimate. Revenue declined 4.4% to $395 million, but exceeded our forecast of $325 million. ERTS lost market share, but the company believes it is well positioned for the Christmas season, especially with new titles for the Nintendo Wii. We are increasing our fiscal year 2008 (March) non-GAAP revenue projection to $3.77 billion from $3.70 billion, but we see higher R&D costs. We are reducing our fiscal year 2008 operating EPS estimate to $0.81 from $0.82, but keeping our 12-month target price of $49.

Before it's here, it's on the Bloomberg Terminal.