S&P Stock Picks and Pans: Merrill Lynch, RIMM, Walgreen

Plus: opinions on Micron Technology, Jabil Circuit, and KeyCorp

S&P REITERATES SELL OPINION ON SHARES OF MERRILL LYNCH (MER; 54.50): An unconfirmed story in The Wall Street Journal reports that MER is in advanced talks to receive a cash infusion of up to $5 billion from a state-owned Singapore investment company. The deal would follow similar investments received by peers, and could help with near-term liquidity concerns. We continue to expect mortgage securities remaining on its balance sheet to be written down an additional 25% to 30% in the fourth quarter, and we caution that a deal of this magnitude may signal internal concerns about capital levels. Our target price remains $48, 1.3 times a lower projected book value. - M.Albrecht

S&P MAINTAINS HOLD OPINION ON RESEARCH IN MOTION SHARES (RIMM; 106.99): November-quarter EPS of $0.65 vs. $0.31 is above our $0.62 estimate, aided by a $0.02 tax benefit. Revenues were slightly better than our model, while gross margin fell short due to demand for lower-margin consumer smartphones. Based on results and February-quarter guidance that was modestly higher than our forecast, we think RIMM is withstanding macroeconomic challenges. We raise our fiscal year 2008 (February) EPS estimate by $0.05 to $2.23 and fiscal year 2009's by $0.20 to $3.10, reflecting stronger revenue growth. We increase our target price by $10 to $110, based on a p-e to growth rate of 1.4X, slightly above peers. - T.Rosenbluth

S&P REITERATES HOLD RECOMMENDATION ON SHARES OF WALGREEN (WAG; 38.63): November-quarter EPS of $0.46 vs. $0.43 is $0.02 ahead of our expectations. We believe sluggish comparable-store sales growth reflects softening consumer demand in an unfavorable economic environment and continued shift to lower priced, but wider margin, generic drugs. However, operating margins widened signficantly more than we expected on well-controlled payroll management despite difficult drug reimbursement comparisons. As a result, we are increasing our fiscal year 2008 (August) EPS estimate by $0.04 to $2.25 and raise our 12-month target price $2 to $43, on forward 12-month p-e analyses. - J.Agnese

S&P REITERATES HOLD OPINION ON SHARES OF MICRON TECHNOLOGY (MU; 7.92): November-quarter loss per share of $0.34 vs. EPS of $0.15 is wider than our $0.11 loss estimate. Sales rose 7% from August-quarter on higher volumes for memory chips. But gross margin narrowed significantly on price deterioration and an inventory write-down. Operating expenses fell, notably a reflection of restructuring. MU is doing a good job cutting costs and improving sales mix. But with expected capital spending plans from memory makers, we expect weaker pricing ahead. We now see a loss of $0.57, compared to our previous $0.19 EPS view. We also reduce our 12-month target price by $4 to $10. - C.Montevirgen

S&P REDUCES OPINION ON SHARES OF KEYCORP TO HOLD FROM BUY (KEY; 21.91): KEY announces additional chargeoffs related to residential property loans, with expected total chargeoffs of $110-$120 million in the fourth quarter. In addition, KEY expects fourth quarter trading results to be adversely affected by the widening of credit spreads. On our expectations for additional loan loss provisioning expenses in 2008, we are reducing our 2008 EPS estimate to $2.80 from $2.90, and our target price to $28, down $9. Our target price is based on a discount-to-peers 10.0X multiple on our 2008 EPS estimate. With the recent dividend increase, the shares yield 7.0%. - E.Oja

S&P DOWNGRADES OPINION ON SHARES OF JABIL CIRCUIT TO SELL FROM HOLD (JBL; 18.42 ): JBL posts November-quarter non-GAAP EPS of $0.36 ($0.30 GAAP) vs. $0.29 ($0.20 GAAP), $0.05 above our operating view, which includes stock option expense. Revenue rose 4%, reflecting a rising share of revenue from networking and telecom segments, and a shrinking share in consumer segment. However, the EMS provider guides well below our second quarter fiscal year 2008 (August) revenue estimate and plans further restructuring. Switching to GAAP basis, we are estimating EPS of $0.80 for fiscal year 2008, and $1.35 for fiscal year 2009. But we are lowering our 12-month target price to $16 from $25 based on our updated p-e analysis. - T.Smith-CFA

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