Analyst Actions: Goldman Sachs, Landstar System, Steel Sector

What Wall Street analysts are saying about selected stocks in the news Thursday

Goldman Sachs (GS)

Rochdale Securities upgrades to buy from neutral

Goldman Sachs Group was upgraded Thursday by Rochdale Securities analyst Richard Bove amid a belief the bank "has solved its capital and cash flow challenges." Bove upgraded Goldman to buy from neutral and increased his price target to $152 from $142.

"The company appears to be using the most conservative valuation techniques of any bank in the country," Bove wrote in a research note. "This implies asset write-ups in the future."

Many major banks have taken steep write-downs on investments, cutting the value of their holdings by hundreds of billions of dollars. If the value of those investments recover, the banks will be able to reverse the charges and reap large gains in future quarters.

The New York-based bank reported better-than-expected first-quarter profit earlier in the week as fixed income revenues surged. Goldman's trading revenues are likely sustainable and investment banking and investment management revenues could also rise, Bove said.

On Monday, Goldman said it earned $1.66 billion, or $3.39 per share, during the first quarter, beating the $1.64 per share forecast of analysts polled by Thomson Reuters. The bank then completed a $5 billion stock sale Tuesday (priced at $123 per share) as part of a plan to help repay the government $10 billion in bailout money it received as part of the Treasury Department's bank investment program last fall.

Bove said the stock sale was unnecessary and only dilutes current shareholders, noting the bank had enough excess capital to repay the investment if wanted to get out from under increased government regulations, such as limits on executive compensation. However, the stock sale demonstrated the strength of Goldman as it has been essentially impossible for banks to raise capital through stock sales in recent months. The sale also helps bolster the bank's capital ratios, Bove noted.

By paying back the government funds, Goldman will be able to spend money on executives that will help it retain and attract top talent, and it also allows Goldman to participate in purchasing distressed assets as part of the government's public-private investment program, Bove said. Goldman has a strong history of investing in distressed assets and could take advantage of the program to add to future profits, he said.

Landstar System (LSTR)

Baird downgrades to neutral from outperform

Baird analyst Jon Langenfeld says Landstar's $0.27 first quarter EPS was below the consensus forecast. He says while pricing pressures accelerated, the rate of volume deterioration has stabilized.

However, while signs of stabilizing demand exist, he is cautious heading into the second quarter given the healthy 2008 comparison, likelihood of a below-seasonal second quarter demand trend, and the potential for pricing pressure to intensify.

Given his expectation for continued difficult trends, he would look for pullbacks to upper $20s before becoming more constructive in the near term.

Steel sector

Credit Suisse upgrades the steel sector from benchmark to overweight

Global demand for steel will grow as economic conditions improve in China, the world's biggest consumer of the metal, Credit Suisse analysts said Thursday as they upgraded the industry.

Orders for steel plunged late last year as the global economic slowdown hit key customers in the automotive, construction and industrial equipment markets. Steel companies have cut production drastically in recent months, and prices have tumbled from record highs in mid-2008.

China had helped fuel a surge in global demand before the downturn. Now China's economy is recovering, with loan and infrastructure investment growing at 27% annually, new home sales rising and manufacturing expanding, Andrew Garthwaite and other Credit Suisse analysts wrote in an investor note.

"We are very confident of the recovery in China," which accounts for 35 percent of the world's steel demand," they wrote. "Nearly all data points have turned."

They wrote that "a huge proportion" of steel is now trading below the cash cost, and that greater production cuts are inevitable to bring supply in line with falling demand. Production outside China -- the world's largest steel maker -- is down 37% year-over-year and has fallen to its lowest level since 1967, the analysts wrote.

Investors have doubted the steel industry's prospects based on fears that higher Chinese export subsidies would undercut global prices, with a consensus estimate of Chinese demand growth of 3%. "In our opinion, this is far too low if China's real investment growth will be up 9% this year ... and China is no longer a net steel exporter on the latest data," they wrote.

The analysts, who upgraded the steel sector from benchmark to overweight, wrote that favored inexpensive steel stocks included Posco (PKX), ArcelorMittal (MT), ThyssenKrupp (TKA) and Nucor (NUE).

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