Ahead of the Bell: Analyst upgrades Sovereign

Friedman, Billings, Ramsey & Co. analyst James Abbott upgraded the Philadelphia-based company to "Market Perform" from "Underperform" and raised his price target to $8 from $6.

The new target implies he expects the stock to dip about 2 percent from Monday's $8.18 close.

Abbott said the capital raise will likely cover "the most probable losses" in the company's portfolio, which has been battered by the subprime credit crisis.

"We expect the stock to remain volatile, and believe it could trade lower in the near term, based on a pattern of other companies that have issued common stock," Abbott said in a note to clients.

For 2008, he raised his forecast to profit of 40 cents per share from 30 cents per share. Analysts polled by Thomson Financial expect, on average, earnings of 75 cents per share for the year.

Sovereign was profitable in the first quarter but the bank set aside $135 million to cover bad loans, nearly triple the reserve in the first quarter last year. More loans in the bank's commercial construction portfolio are not being repaid, the company said in April.

Yet Sandler O'Neill & Partners analyst Joseph Fenech cut his estimates, and said the stock raise will likely dilute future earnings.

"While the capital raise provides more cushion, we certainly wouldn't characterize Sovereign's capital position as robust," Fenech said in a note to clients.

For 2008, he cut his earnings estimate to 69 cents per share from 82 cents per share.