S&P Picks and Pans: Countrywide, WaMu, Big Techs
S&P MAINTAINS SELL OPINION ON SHARES OF COUNTRYWIDE FINANCIAL
Countrywide is indicated to open down sharply today after it cites in an SEC filing "unprecedented disruption" in the secondary market for mortgage loans. It will likely be forced to hold more loans on its books rather than sell into the secondary market at adverse terms. Though Countrywide claims access to $46 billion in capital, it also says that "the potential impact on the company is unknown." We note that the longer the secondary market stays illiquid, the more severe the drain on available capital. We cut our target price $6 to $20, 7.1 times our 2007 estimate of $2.82, below historical levels. /S. Plesser
S&P MAINTAINS HOLD OPINION ON SHARES OF WASHINGTON MUTUAL
WaMu in an SEC filing says the secondary market for the loans they originate "has diminished significantly." We note that the company's liquidity may be diminished as it is forced to hold larger amounts of loans on its books. WaMu's loan portfolio is comprised of roughly 10% subprime loans, which will likely need to be written down further. WaMu's credit card business, though, offers some diversification from housing market. We are lowering our 2007 EPS estimate 7 cents to $3.64, and our 12-month target price by $5 to $37, roughly 10.2 times our 2007 EPS estimate, below historical levels. /S.Plesser
S&P MAINTAINS NEUTRAL FUNDAMENTAL OUTLOOK ON THE IT SECTOR, FAVORS LARGE CAPS
Despite significant credit-market issues, we think fundamentals for many tech companies are largely intact. Although consumer and enterprise spending may be adversely impacted, we see benefits from secular growth trends, new products and non-U.S. sales. We think large caps often have notable brand equity, diversified revenue, and durable businesses, as well as considerable balance-sheet and stock-market liquidity. Sector Strong Buys with market caps over $10 billion include ADP (ADP; $47.55), EMC (EMC; $17.74), Corning (GLW; $23.59), IBM (IBM; $110.73), Intel (INTC; $23.92), Microsoft (MSFT; $29.30), Oracle (ORCL; $20.09), Seagate Technology (STX; $23.22), and Texas Instruments (TXN; $33.13). /S.Kessler
S&P UPGRADES SHARES OF ACCENTURE TO BUY FROM HOLD, BASED ON VALUATION
Accenture shares have declined 9% since their recent peak of $43.81 on July 23, and are currently selling at 17.4 times our calendar 2008 EPS estimate of $2.28, in line with traditional outsourcing peers. We believe a premium to peers is warranted, however, based on our view of Accenture's improving operating margins, the strength of its higher-margined consulting business, and what we see as a solid balance sheet. Our target price remains $47, using a peer-premium p-e of 20.6 times and a p-e-to-growth ratio of 1.37 times, using our calendar 2008 EPS estimate and assuming a three-year growth rate of 15%. /D.Cathers
S&P UPGRADES GAP INC SHARES FROM TO HOLD FROM SELL
In addition to improving merchandise arriving in the stores, Gap is improving inventory management. This allows more moderate markdowns to move excess, improving merchandise and gross margins. Also, SG&A expenses are declining in tandem with headcount reductions, or 1500 year-to-date and 2000 in fiscal 2007 (ended January). We see brand positioning problems and further store closures for Gap brand, but believe Old Navy could be a winner in back-to-school. We are lifting our fiscal 2008 and fiscal 2009 EPS estimates to 95 cents and $1.05 from 84 cents and $1.00. Our 12-month target price goes to $18 from $15. /M.Driscoll-CFA
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