Analyst Actions: Merrill, Aeropostale, Talbots, Visual Sciences

Comments from Wall Street analysts on selected stocks on Friday


Merrill Lynch (MER) shares were downgraded to neutral from outperform by Credit Suisse. The stock fell 3.3% to $74.14 on Oct. 8.

Analyst Susan Roth Katzke says that on Friday, Oct. 5, Merrill pre-announced a net loss for the third quarter of "up to 50 cents per share". Katzke says we know this was a challenging quarter; we've seen this in the results of many of the company's peers. But the analyst says that unique to Merrill is that such challenges are translating to a net loss. Merrill was the biggest player in the CDO/CLO markets and a relative newcomer to mortgage/subprime mortgage biz, says Katzke. She notes its net losses in the LBO financing arena, at 1.5% of period-end commitments, are below peer average.

Katzke cut her $7.90 2007 EPS estimate to $5.85, and her $8.85 forecast for 2008 to $7.85. Looking at price-to-book value vs. return-on-equity correlations, the company's track record, and its forecast discounted cash-flow, she cut the firm's target price on Merrill shares to $85 from $95.


Caris & Co. downgraded its rating on apparel retailer Aeropostale (ARO) to average from above average. The shares fell 8.8% to $19.67 on Oct. 8.

Analyst Scott Birkby says he downgraded the shares due to less transparency and greater uncertainty of drivers of gross and operating margin expansion in the fourth quarter and fiscal 2008 (ending January). He believes there have been some fundamental changes in the company's operating strategy that may lead to weak or negative comparable-store sales to persist through the second half of fiscal 2008. While he thinks third-quarter EPS guidance is not at risk, Birkby believes the fourth-quarter and fiscal 2008 EPS consensus views are too aggressive. The analyst cites the lack of transparency underlying gross profit margin expansion, continued cost pressures and, the lack of a catalyst to generate comp-store sales growth.

Birkby says his $21 price target is based on 12 times his $1.71 fiscal 2009 EPS estimate.


Friedman Billings Ramsey downgraded its recommendation on Talbots (TLB) to underperform. The shares declined 6.2% to $18.26 on Oct. 8.

Analyst Adrienne Tennant says the downgrade on the women's apparel retailer (from market perform) was based on ongoing weak traffic at both divisions; the company's debt-laden balance sheet; and its weak "missy" segment. While she believes valuations are likely bottoming in the retail space, Tennant maintains there are still pockets, such as the missy segment, that will continue to underperform. Given the attractive valuations on many names in the apparel retail segment, Tennant is concerned Talbot's may continue to disappoint investors and that other investment opportunities are more appealing.

The analyst cut her fiscal 2008 (ending January) EPS estimate from 32 cents to 20 cents, and her 98 cents fiscal 2009 forecast to 84 cents.


Needham downgraded its rating on Visual Sciences (VSCN) to hold from buy. The shares fell 4.4% to $14.92 on Oct. 8.

Analyst Mark May says his checks suggest that the competitive environment remains tough for Visual Sciences, likely resulting in uninspiring financial results. Specifically, believes both OMNITURE and Coremetrics are taking market share from the company. He says Visual Sciences announced in July, 2007, that it had hired an investment bank "to assess interest expressed by multiple parties". He notes that recent conversations suggest that the M&A market for similar assets is decent but not robust. As such, even if a sale is consummated, May now believes the premium could be lower than some had previously expected.

May is keeping his EPS forecasts of 54 cents for 2007 and 66 cents for 2008, which are at the low end of Street consensus estimates.

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