S&P DOWNGRADES SHARES OF BANK OF AMERICA TO STRONG SELL FROM SELL (BAC; 23.47):
BAC has completed its acquisition of Countrywide Financial (CFC), and we believe its risk level has been elevated from CFC's deteriorating mortgage portfolio. We estimate that BAC will add roughly $95 billion of CFC's mortgage loans to its own $868 billion dollar loan book. About $27 billion of these loans are Option Arm, which we believe haven't yet been stress-tested. We look for BAC to increase its provisions and to cut its dividend to preserve capital. We are reducing our 12-month target price by 5 to 19, a below-peer 8.8 times our 2008 EPS estimate of $2.16. -S. Plesser
S&P RAISES OPINION ON SHARES OF YAHOO TO BUY FROM HOLD, ON VALUATION (YHOO; 19.71):
YHOO is down some 33% since the high achieved on May 2, the day before Microsoft (MSFT; 27.09) announced it was withdrawing its acquisition proposal. We are well aware of YHOO's troubles, including a less firm global online advertising market, notable competition, recent losses of substantial management talent, inconsistent execution, and considerable distractions and uncertainty related to the Aug. 1 shareholder meeting. Nonetheless, after reviewing/revising our valuation analyses, we keep our 12-month target price of 27. We think investors should to some extent look past the seemingly never-ending negative newsflow related to YHOO, and focus on the stock's valuation and risk-reward. We acknowledge YHOO faces some enormous challenges, but believe they are at least largely priced into the shares. Excluding the value of equity investments and cash and equivalents, YHOO has an 2008 p-e of 18. We are establishing EPS estimates of $0.63 for 2009 and $0.74 for 2010, and thus see 3-year average EPS growth of 17%. We think considerable shareholder dissatisfaction and unrest could be a positive catalyst. -S. Kessler
S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF GENERAL MOTORS (GM; 12.73):
GM shares are rebounding today as June light vehicle volumes slumped just 18% from a year ago, or 8.0% adjusted for fewer selling days, ahead of expectations. Retail performance was better. Overall inventories are down, with GM still to cut third quarter production for trucks while increasing car production. The company's new product introductions over the next 18 months will weigh towards smaller vehicles, which is in line with the market mix shift. Results should buoy some of GM's depressed parts suppliers, as worst fears were not realized, but we do not think GM is out of the woods yet. -E. Levy-CFA
S&P DOWNGRADES OPINION ON BIOVAIL SHARES TO STRONG SELL FROM HOLD (BVF; 9.69):
We see management mired in a struggle with E. Melnek, BVF's founder and holder of 12% of its stock, for control of the company. Melnek threatened that, if he loses his fight for BVF, he would start a new drug firm that would focus on BVF's original drug delivery business model. We think present management plans to focus on development of new CNS drugs entails significant risk. We see EPS declining sharply over the next few years. We also think BVF's $1.50 dividend is not sustainable. We are lowering our 12-month target price by 7 to 7 on revised DCF assumptions. -H. Saftlas
S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF FORTUNE BRANDS (FO; 55.35):
FO lowers its EPS guidance for June-quarter and full 2008, citing a worsening U.S. housing market, a deferral of big ticket purchases of golf clubs, a moderation in the trading up in the U.S. to premium spirits, higher costs for petroleum-based materials, glass and steel and a 70% increase in Australian taxes on ready to drink spirits, which are high-margined items. We are reducing our 2008 operating EPS estimate by $0.69 to $4.09, which is at the low end of guidance. We also lower our blended sum-of-the-parts and historical p-e-based 12-month target price by 9 to 66. -L. Braverman, CFA