S&P Stock Picks and Pans: Bear Stearns, Goldman, FedEx, D.R. Horton, Palm

Analysts' opinions on stocks in the news

Bear Stearns (BSC; 115.75)

S&P reiterates strong sell opinion

Analyst: Matthew Albrecht

August-quarter EPS of $1.16, vs. $3.02, misses our $2.72 estimate. Fixed income capital markets revenues declined 88% from the prior year, debt underwriting also fell, and BSC posted a loss at its wealth management segment due to losses related to two recently closed hedge funds. Costs also rose for the period. Book value fell sequentially by about 1%; we await management's comments in order to provide some clarity on the matter. We are cutting our fiscal year 2007 (November) EPS estimate by $3.25 to $9.87; and keeping our target price at $90, 1.1 times projected 12-month book value, a discount to peers.

Goldman Sachs Group (GS; 205.50)

Reiterates hold opinion

Analyst: Matthew Albrecht

August-quarter EPS of $6.13 vs. $3.26 beats our $4.55 estimate. Revenues increased across the board, as robust customer activity and solid risk management procedures offset losses on non-prime loans and loan commitments. Credit writedowns totaled $1.5 billion, net of hedges, but mortgage exposure was covered by hedging positions, netting a gain for the period. We are raising our 12-month target price by $25 to $210, 2.1 times projected fiscal year 2008 (November) yearend book value, in line with peers.

FedEx (FDX; 104.65)

Maintains strong buy

Analyst: James Corridore, Richard Tortoriello

August-quarter EPS of $1.58, vs. $1.53, on an 8% sales rise is a penny above our estimate. For fiscal year 2008 (May), FDX sees a softening U.S. economy and higher fuel prices hurting profit growth. As a result, we are lowering our fiscal year 2008 EPS estimate by $0.25 to $7.00. However, our outlook for FDX remains positive. We continue to see strong international economic growth and expect the U.S. to benefit from recent interest rates cuts. Given our view of continued marketshare gains for FDX, margin improvement opportunities, and an attractive valuation, we view this investment opportunity as compelling.

D.R. Horton (DHI; 15.19)

Upgrades to buy from sell

Analyst: Ken Leon, CPA

As DHI is the largest U.S. homebuilder, we see reduced interest rates raising affordability in its targeted market for first-time buyers and move-up buyers. Less than 5% of DHI's pending contracts are sub-prime borrowers. We view DHI as one of the best managed homebuilders, with strong SG&A cost controls and the drive to lower labor costs with subcontractors and material costs. DHI is targeting $1 billion in cash flow from operations in fiscal year 2007 (September). Given DHI's 4% dividend yield, and after applying a premium-to-peers price-to-book of 1.1, we are lifting our target price by $5 to $18.

Palm (PALM; 15.79)

Maintains hold opinion

Analyst: Todd Rosenbluth

Ahead of reporting August-quarter EPS after the market close on Oct. 1, PALM pre-announces a revised guidance range. The company's revenues should be slightly lower than we expected, gross margin should be weaker, but EPS before one-time items should be $0.01 higher. We believe EPS will be aided by lower marketing expenses following a product cancellation, but we contend that full results will reflect the challenges PALM faces against stronger smartphone competitors. However, we believe the shares will be supported following the recent shareholder approval of a recapitalization.

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