S&P Stock Picks and Pans: Lowe’s, Nasdaq, Thornburg Mortgage, Countrywide, VeraSun Energy
Lowe’s Companies («www.businessweek.com»; $28.62)
S&P reiterates buy recommendation
Analyst: Michael Souers
July-quarter EPS of $0.67 vs. $0.60 is $0.05 higher than our estimate. A same-store sales decline of 2.6% was in line with our projection of a 3.0% decline. Despite the better EPS than we expected, we see Lowe’s impacted by continued weakness in the housing market throughout the rest of 2007 and well into 2008. We are maintaining our fiscal year 2008 (January) estimate of $2.01, but lower fiscal year 2009’s to $2.28 from $2.32. We are also reducing our 12-month DCF-based target price by $2 to $38. However, we find Lowe’s attractive, trading at about 12.5 times our fiscal year 2009 EPS estimate, a modest discount to the S&P 500.
Nasdaq Stock Market («www.businessweek.com»; $32.40)
Maintains hold
Analyst: J. Willey
NDAQ has begun exploring strategic alternatives for its 31% stake in the London Stock Exchange, and we expect interest from multiple bidders. NDAQ plans to use the proceeds from any sale to pay down its $1 billion senior term debt and to repurchase shares. The company indicated the planned sale would increase its standalone EPS by $0.30-$0.35 in 2008. While we think the sale of LSE stake would remove a large overhang and improve the balance sheet, we remain cautious on the shares given the likely need for higher bid for OMX AB and limited diversification in NDAQ’s business model.
Thornburg Mortgage («www.businessweek.com»; $13.70)
Reiterates sell recommendation
Analyst: J. Willey
TMA announces the sale of $20.5 billion of its mortgage-backed securities, 36% of its total loan portfolio at the end of the second quarter. The company will recognize a loss of about $930 million on the sale, and GAAP book value has fallen to $12.40 at Aug. 17 from $19.38 at June 30. While we see the sale and reduction in short-term borrowing obligations providing near-term stability, we expect a negative impact on future earnings, and we believe TMA’s dividend will need to be reduced. We believe the credit and mortgage markets remain highly volatile, and we see risk of further book value impairment.
Countrywide Financial («www.businessweek.com»; $22.10)
Maintains sell opinion
Analyst: Stuart Plesser
In an effort to offset the likelihood of lower mortgage originations in the months ahead, CFC has begun laying off employees, mostly in its reduced document loan business. Although the move is prudent, in our opinion, it is coming a bit late. Separately, CFC is facing heavy withdrawals at its thrift operation. At the very least, this should hurt its net interest margin, since it will likely be forced to offer higher deposit rates to offset perceived risk. More significantly, this may impact CFC’s ability to finance new loans. Our 12-month target price remains $20.
VeraSun Energy («www.businessweek.com»; $12.88)
Upgrade to hold from sell, on valuation
Analyst: S. Ham-CFA
The company is going through a period of high growth, driven by expansion of ethanol production. VSE recently acquired 330 million gallons of production capacity to help it expand to 1 billion gallons of ethanol by 2009 from 230 million gallons at the end of 2006. We expect EPS to rise from $0.44 in 2007 to $1.14 in 2008. After blending our DCF and relative p-e valuations, we are keeping our 12-month target price at $14, a premium to peers p-e of 16.5 times our 12-month forward EPS estimate. With the shares down 11% in the past two months and below our target price, hold.
