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The Zacks Analyst Blog Highlights: U.S. Bancorp, Goldman Sachs Group, PNC Financial Services Group, Bank of America and Altera

Zacks Equity Research

For Immediate Release

Chicago, IL – December 6, 2012 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include U.S. Bancorp (USB), Goldman Sachs Group Inc.’s (GS), PNC Financial Services Group Inc. (PNC), Bank of America Corp. (BAC) and Altera Corporation (ALTR).

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Here are highlights from Wednesday’s Analyst Blog:

U.S. Bancorp to Up Repurchase Reserve

U.S. Bancorp (USB) plans to boost its mortgage repurchase reserves in the fourth quarter of 2012. The decision comes on the heels of Freddie Mac’s increase in its repurchase requests. The company conveyed this information to investors at Goldman Sachs Group Inc.’s (GS) financial services conference yesterday, according to a Reuters report.

Government sponsored enterprises (GSEs) such as Freddie Mac and Fannie Mae have already made repurchase demand on mortgages written between 2005 and 2008. However, last Friday, Freddie Mac informed lenders that it would initiate repurchase demands on mortgages generated in 2004.

Therefore, to meet the increased repurchase demands, U.S. Bancorp deemed it fit to beef up its reserve level. It would adversely impact its earnings by one to two cents in the fourth quarter.   
The Back Story

In the aftermath of the real estate market collapse in 2008 and the financial crisis, mortgage and mortgage backed securities occupied a significant share of the entire financial system. In several situations, the legitimacy of the mortgages as well as the documents was questioned. The mortgage originators did not exercise due diligence in several cases and also deliberately defrauded.

When banks sell mortgage-backed securities to investors and GSEs, there is a clause that can force a bank to buyback the securities in the event of fraudulent or faulty underwriting or origination of the underlying mortgage. Therefore, in cases of fraudulent and faulty origination documents, the holder of the mortgage-backed securities demands buybacks from the seller of the security.

In fact, a number of Wall Street Big banks have suffered severe losses for costs associated with such activities. PNC Financial Services Group Inc. (PNC) and Bank of America Corp. (BAC) too have experienced increased demands for mortgage repurchases from the GSEs.

In Conclusion

Currently, U.S. Bancorp is expected to report earnings of 75 cents per share in the fourth quarter. Though this elevation in repurchase reserve would slightly hurt the company’s earnings in the fourth quarter, we believe that given its solid financial position, the company can efficiently handle this mortgage repurchase issue and make adequate reserves.

U.S. Bancorp also boasts an attractive core franchisee and diverse revenue stream that helped it achieve strong performance in the past years. Solid capital position and increase in lending activities augur well. Yet, regulatory issues along with the expectation of a continued low interest rate environment are likely to limit the stock’s upside potential in the upcoming quarters.

Currently, U.S. Bancorp shares maintain a Zacks #2 Rank, which translates into a short-term Buy recommendation. As the repurchase issue is expected to impact the company’s earnings, downward estimate revisions might surface in the near term and affect the Zacks Rank.

Altera Trims Outlook, Shares Fall

Chipmaker Altera Corporation (ALTR) recently trimmed its revenue guidance for fourth quarter 2012 and updated its financial guidance for 2013.  

Altera now expects revenue to be 8% to 10% lower than the third-quarter levels, compared to the previous guidance of down 6% to 10%. 

This translates into revenues of $445.5 million – $465.3 million, down from the previous estimate of $455.4 million – $465.3 million. 

The solid growth in new products will be more than offset by lower sales of the company’s existing products. 

Meanwhile, for 2013, gross margin is targeted around 69% – 70%. Research and Development is estimated at approximately $104 million, driven by increased variable compensation expense and stock-based compensation. SG&A is likely to come around $315 million on the back of variable compensation for bonus, sales commission and stock-based compensation.

Other Income/Expense is projected at $1 million. Tax rate is expected to be 13%. Capital expense is expected to be $65 million. 

Earlier, Altera reported a net income of $157.5 million or 49 cents per share in the third quarter of 2012, easily beating the Zacks Consensus Estimate of 46 cents per share.

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