S&P MAINTAINS BUY OPINION ON SHARES OF VERIZON COMMUNICATIONS (VZ; 39.00):
VZ confirms plans to acquire privately held Alltel in a $28 billion transaction, equal to 8.3 times EBITDA, including $22 billion in assumed debt, pending approvals that it expects by end of 2008 when a new FCC is seated. We believe VZ's initial operating and capital expense savings targets of nearly $1 billion in the first year could prove conservative given VZ's higher EBITDA margins and scale with vendors and advertisers. But we see risks, given VZ's network expansion plans and the increased debt. We leave our 12-month target price at 42 and see VZ's dividend yield of 4.4% as well supported. -T. Rosenbluth
S&P DOWNGRADES OPINION ON SHARES OF AMBAC FINANCIAL TO SELL FROM HOLD (ABK; 2.49):
Despite their precipitous decline, we see the shares coming under additional pressure in the aftermath of ABK's decision, announced last night, not to raise additional capital to support a top-tier financial strength rating. We believe the loss of this rating would imperil ABK's ability to write new business and remain viable as a financial guaranty entity. Longer term, ABK's municipal bond business could prove valuable, but we would sell the stock. We are cutting our target price by 4 to 2, which assumes ABK trades at 50% of stated book value, in line with its closest peers. -C. Seifert
S&P REDUCES RECOMMENDATION ON SHARES OF CIENA CORP. TO HOLD FROM BUY (CIEN; 30.46):
April-quarter EPS of $0.33, vs. $0.22, is below our $0.37 estimate, reflecting higher-than-expected stock option expense. Both sales and gross margin exceeded our forecast, on strong demand for optical gear with customers needing to handle an increasing use of network bandwidth. While we expect the strong industry fundamentals to continue, we see higher operating expenses, partly related to recent acquisition of World Wide Packets, hampering operating margin expansion. We lower our 12-month target price by 4 to 32, 20 times our fiscal year (October) EPS estimate of $1.60, in line with peer average. -A. Bensinger
S&P REITERATES STRONG BUY OPINION ON SHARES OF CONTINENTAL AIRLINES (CAL; 14.50):
CAL plans to cut fourth quarter domestic departures by 16% and capacity by 11% and phase out 737-300 and -500 aircraft, while still taking delivery of more efficient 737-800 and -900ERs. An employee reduction of 3,000 is planned. We think meaningful capacity is starting to come out of the domestic system, which should lead to sharply higher fares in 2009. We expect further capacity-cut announcements from other legacy carriers. Based on this news, our positive view of CAL's strategy, its position relative to peers, and a potential pullback in oil, we think CAL shares are undervalued. -J. Corridore
S&P KEEPS HOLD RECOMMENDATION ON SHARES OF LEHMAN BROTHERS (LEH; 32.90):
Ahead of May-quarter results, we are lowering our second quarter estimate to a loss of $0.53 from $1.06 EPS. We expect writedowns associated with mortgage exposure and hedges that did not perform, along with a slowdown in other core businesses. Also, we project compensation will increase on a percentage basis. We lower our full fiscal year 2008 (November) EPS forecast to $2.61 from $4.30, but keep our target price at 38, 1.0 times projected book value, a discount to peers. While fundamentals appear sound and despite recent weakness in share price, we think too much headline risk remains to add to positions. -M. Albrecht
S&P REITERATES HOLD RECOMMENDATION ON SHARES OF SMITHFIELD FOODS (SFD; 28.83):
SFD posts April-quarter EPS of $0.01, vs. $0.46, $0.10 below our forecast. Record high feed costs and lower live hog prices had a considerable negative impact on hog production operations, despite lower raw material costs and strong export demand within pork processing operations. Although industry hog supplies are being liquidated, we believe the current oversupply will continue to have a significant negative impact on SFD's fiscal year 2009 (April) results. As a result, we are reducing our fiscal year 2009 EPS estimate by $0.40, to $1.40, and our 12-month target price by 2, to 30, on updated p-e analysis. -J. Agnese