S&P Picks and Pans: Microsoft, Yahoo, Google, Alcoa, Rio Tinto
UPDATE - S&P DOWNGRADES SHARES OF YAHOO INC. TO HOLD FROM BUY, ON VALUATION
Even though Yahoo is trading below the value of the acquisition offer made this morning by Microsoft of $31 or an implied value of roughly $29.50 in Microsoft stock, we believe the shares are now reasonably priced. We think Microsoft could eventually increase the value of its offer, especially if Yahoo continues to maintain its interest in remaining an independent company. But we do not see material upside from current levels. Moreover, we do not expect another major suitor to materialize. We are raising our target price to $31 from $24, based on the value of Microsoft's offer. /S. Kessler
S&P REITERATES STRONG BUY RECOMMENDATION ON SHARES OF MICROSOFT
Microsoft has made a proposal to Yahoo to acquire all outstanding shares for $31 each in a cash and stock deal valued at $44.6B. We view this acquisition positively because it would help MSFT compete more effectively against Google in search engine and online advertising. Although the merger presents integration challenges, Microsoft identifies $1 billion of synergies in areas of online advertising yield, capital expenditures, and research and development. Microsoft expects the deal to close in the second half of of 2008, subject to customary approvals, and to be dilutive to EPS. /J. Yin
S&P REITERATES HOLD OPINION ON SHARES OF GOOGLE INC.
With stock options, Google posts Q4 EPS of $3.79 vs. $3.38, above our $3.55 forecast. Google's operating expenses and tax rate were lower than we projected. Gross revenues rose 51%, matching our estimate. The shares are off 8% today, as year-over-year revenue growth continued to decelerate and traffic acquisition costs ticked higher. We also have concerns about decelerating growth in clicks. We are cutting our EPS estimates to $16.59 from $16.62 for 2008 and to $18.69 from $19.98 for 2009. Based on revised peer and intrinsic analyses, we are cutting our 12-month target price to $650 from $670. /S. Kessler
S&P MAINTAINS NEUTRAL STANCE ON SHARES OF BOND INSURERS
We expect the group to strengthen today amid unconfirmed media reports on CNBC and others that eight banks have formed a consortium to seek a rescue plan for the troubled bond insurers. Though we applaud these efforts, we note that "bailout" plans typically focus on protecting the interests of policyholders and creditors, not necessarily common equity holders. We advise investors to buy Assured Guaranty (AGO; $23.92) on its superior-to-peers financial strength, hold Ambac (ABK; $12.54) and Security Capital (SCA; $3.34); and sell MBIA (MBI; $15.63). /C. Seifert
S&P REITERATES STRONG BUY RECOMMENDATION ON SHARES OF MICROSOFT
Microsoft has made a proposal to Yahoo to acquire all outstanding shares for $31 each in a cash and stock deal valued at $44.6B. We view this acquisition positively because it would help MSFT compete more effectively against Google (GOOG) in search engine and online advertising. Although the merger presents integration challenges, Microsoft identifies $1B of synergies in areas of online advertising yield, capital expenditures, and research and development. Microsoft expects the deal to close in the second half of of 2008, subject to customary approvals, and to be dilutive to EPS. /J. Yin
S&P REITERATES BUY OPINION ON SHARES OF YAHOO INC.
Microsoft announces a hostile offer for Yahoo, valued at $45B. Stockholders would receive $31, or 0.9506 of a Microsoft share, for each Yahoo! share owned, a 62% premium to 1/31's closing price. MSFT states about a year has gone by since Yahoo rejected a prior offer, because Yahoo! saw "potential upside" with new initiatives such as Panama. MSFT concludes these efforts have not changed Yahoo's "competitive situation." We think Yahoo is under enormous pressure to realize value, and such a deal would serve this purpose. We will update after Microsoft's call this morning. /S. Kessler
S&P REITERATES BUY OPINION ON SHARES OF ALCOA INC.
Shares of Alcoa are up in pre-market trading after news that the company and Aluminum Corp. of China (ACH) jointly acquired a 12% stake in Rio Tinto, one of the world's largest base metals mining companies. Alcoa's share of the investment totals some $1.2 billion. We have a favorable view of the investment, which gives Alcoa exposure to base metals besides aluminum and also exposure to gold. We continue to estimate EPS of $3.05 for 2008 and think Alcoa is attractively valued. We keep our P/E-based 12-month target price at $42. /L. Larkin
S&P REITERATES HOLD OPINION ON ADSS OF RIO TINTO PLC
The ADSs are trading sharply higher in the pre-market on news that Alcoa Inc. and Aluminum Corp. of China jointly acquired a 12% stake in RTP, which is currently fending off an unsolicited takeover attempt by BHP Billiton (BHP) . In our opinion, this equity investment will place pressure on BHP to sweeten its offer in order to accomplish its proposed merger. UK regulatory authorities have given BHP until Feb. 6 to implement or drop its offer. We are maintains our 12-month target price of $490. /L. Larkin
S&P UPGRADES OPINION ON SHARES OF QUESTAR CORP TO BUY FROM HOLD, ON VALUATION
Shares have fallen 11% since hitting a recent high on Jan. 14, vs. a 2.7% drop in the S&P 500 and an almost 12% drop in the S&P 500 Gas Utilities Index. We think the current valuation of 16.8X (a 9% premium to peers) our 2008 EPS estimate of $3.03 is too low. We expect significant expansion of peer valuations during the next 12-months. This, coupled with our expectation of higher-than-average EPS growth for Questar, leads us to believe Questar shares are attractive. We think a P/E of 20.1X our 2008 EPS view (a 15% premium to our peer target), or a target price of $61, is more appropriate. /C. Muir
S&P REITERATES HOLD RECOMMENDATION ON SHARES OF MURPHY OIL
Murphy posts Q4 operating EPS of $1.28 vs. $0.59, reflecting improved pricing and volumes. EPS beat our estimate by 4 cents. Start-up of the Kikeh oil field in Malaysia aided oil & gas production, which climbed 35%, above our expectations; we expect Q1 volumes will be flat from Q4, with over 30% growth in 2008. We lower our 2008 operating EPS estimate by 85 cents to $5.28, but raise 2009's by 3 cents to $6.06. Blending our discounted cash-flow (DCF) and relative valuations, we reduce our target price by $2 to $80, representing an expected enterprise value of 6.9X our 2008 EBITDA estimate, a premium to peers. /T. Vital
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