S&P Stock Picks and Pans: Home Depot, AnnTaylor, Whole Foods, Palm

Analysts' opinions on stocks in the news

Home Depot (HD; $34.61)

S&P reiterates strong buy

Analyst: Michael Souers

An unconfirmed report in the WSJ says HD has agreed to accept $1.2 billion less in the sale of its HD Supply unit, bringing its asking price down to around $9.1 billion. While financing remains an issue, we believe the deal will ultimately close. We believe a resolution would be a positive catalyst for the shares, enabling HD to proceed with its self-tender offer for about 250 million shares. The stock seem very undervalued to us, trading now at about 11.8 times our fiscal year 2009 EPS estimate of $2.93, a cyclically depressed earnings year. We are keeping our 12-month target price at $48.

AnnTaylor Stores (ANN; $31.46)

S&P upgrades to buy from hold

Analyst: Marie Driscoll, CFA

July-quarter EPS of $0.50 vs. $0.59 misses our $0.54 estimate as gross margin contracted 670 basis points on merchandise misses at Loft units. July-quarter same-store sales declined 6%, down 3% at Ann Taylor Stores and 11% at Loft. We see second half momentum building on fall merchandise, with more color, novelty and relaxed wear-to-work, and on easy comparisons and personal care launch. A new boomer concept, elevated offering at Ann Taylor Stores, expanding outlet division and SG&A cut 200 basis points are pluses that drive our upgrade. We are maintaining our fiscal year 2008 (January) EPS estimate of $2.10 and our target price of $41.

Whole Foods Market (WFMI; $43.34) and Wild Oats (OATS; $18.10)

S&P reiterates hold opinion

Analyst: Joseph Agnese

WFMI has been cleared to complete its purchase of Wild Oats after U.S. Court of Appeals denies the FTC's request for a stay and dissolves the injunction preventing the acquisition from proceeding. We believe the transaction, which is a tender offer for all outstanding shares of OATS at a price of $18.50 cash, will be completed by Monday, Aug. 27. We continue to view the about-$700 acquisition favorably based on our expectation of benefits from the removal of a competitor, entrance into new markets and sharing of best practices. As a result, we are increasing our 12-month target price on Whole Foods by $4 to $50 on updated p-e and comparative analyses.

Palm Inc. (PALM; $15.25)

S&P maintains hold opinion

Analyst: Todd Rosenbluth

With the summer nearly complete, we are concerned about a delayed launch of PALM's Foleo, which is a small portable computer designed to be a smartphone companion. We are lowering our fiscal year 2008 (May) EPS estimate by $0.02 to $0.43 to reflect our expectation of higher R&D expenses. We look for revenues to be driven mostly by sales of Treo handsets, although we see challenges from new offerings from competitors. We expect a pending recapitalization of the balance sheet, driven by a private equity cash infusion, to support PALM shares. We are keeping our 12-month target price of $16.

Forest Oil (FST; $40.10)

S&P upgrades to buy from hold, on valuation

Analyst: M. Kay

FST gave guidance for the first time since it acquired Houston Exploration. We see 2007 volumes of 427 Mmcfe/day, up 23%, and 2008's of 543 Mmcfe/day, up 27%, mainly on acquisitions. We lower our 2007 EPS estimate to $2.57 from $2.88, but raise 2008's to $3.78 from $3.25. Our 2007 view includes an $0.11 asset sale gain and a $0.21 loss on derivatives. We are lifting our target price $2 to $47, on a blend of our DCF model and relative peer analysis. Estimates are based on crude oil and natural gas price forecasts of $67.39/Bbl and $7.27/Mcf for '07 and $73.75/Bbl and $8.19/Mcf in 2008.