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Get Four
|  | JANUARY 24, 2005
A Year for the Choosy Buyer [Page 2 of 2] Q: Are you concerned about the weak dollar and large trade deficit? Are you making any defensive moves? A: S&P is concerned about the widening trade deficit, and the drop in the U.S. dollar to a record low suggests that it's beginning to bother the market as well. The U.S. trade gap can be closed, though, only if other countries reduce their trade surpluses. The falling dollar will reduce incentives for foreign inflows and thus raise interest rates and bond yields. As a result, we expect the dollar to drop near $1.50 per euro over the next two years. The short-term impact could be to increase the trade gap, since the weaker dollar will increase dollar costs of imports. But in the longer term, this is the market's price mechanism to balance the trade account. S&P's posture for investors is to recommend an exposure to foreign equities of approximately 15% of their investment allocation. Q: What's happening with Prudential (PRU )? A: S&P recommends investors hold the shares of Prudential. S&P expects solid growth for financial-services businesses, due to continuing strong organic growth, the company's international operations, and contributions from the recent acquisitions of American Skandia, Cigna, and Hyundai [Hyundai Investments & Securities Co. and Hyundai Investment Trust Management Co., units of Korea's Hyundai Group]. S&P remains somewhat skeptical, however, regarding the goal of 12% equity by the end of 2005, in light of its average historical ROE [return on equity] of mid-single digits historically. Although the shares trade at a discount to our forecast of fair value, we think the potential upside is offset by risks that include an investigation by the New York State Attorney General of relationships and practices among group life underwriters and insurance brokers. Q: Comments about Bank of America (BAC )? A: S&P recommends a strong buy on Bank of America. BAC posted fourth-quarter EPS [earnings per share] today that was one penny below our estimate, but in line with the Street's expectations. Results reflect strong momentum across all businesses, good credit quality, and cost savings from the ongoing integration of Fleet. The company expects 2005 operating EPS to exceed $4 despite the rising-interest-rate environment and flattening yield curve. S&P is maintaining its 12-month target price of $54. Q: How do you rate Infosys Technologies (INFY ), the Indian info-tech company? A: S&P recommends buying the ADRs of Infosys Technologies. The company reported third-quarter earnings per ADS that were ahead of our estimate. Revenue grew 53%, and strength was seen in the company's finance, telecom, and manufacturing segments. Infosys said it added new clients and repeat businesses, as well as (having) stable pricing. Our 12-month target price is $75. Q: Any thoughts on Zimmer Holdings (ZMH )? Pricey? A: S&P recommends investors hold the shares of Zimmer. While the company is well-positioned across the orthopedic joint-replacement markets, it faces some challenging comparisons this year with less favorable currency exchange rates likely. The shares appear to us as fully valued at current levels. Q: What are your short-term and long-term on Agilent Technologies (A )? A: S&P recommends investors hold the shares of Agilent. Recent revenues have reflected a cyclical recovery in the company's semiconductor test equipment, but they have since come under some pressure and leave investors uncertain as to future trends. Based on our analysis, we view the shares as fully valued at current levels. Q: How about retailers? Any comment on Target (TGT ), Kohl's (KSS ), and TJX (TJX ) [parent of TJ Maxx and others]? A: S&P's investment outlook on apparel retailers is neutral, with employment and consumer-sentiment trends improving, Please hold while I look something up. S&P recommends a hold on Target. Its recent same-store sales increase in December exceeded our projections. However, with growth partly driven by promotions, Target warned that its January-quarter earnings would likely fall short of its earlier guidance. Our 12-month target price on TGT remains $50. S&P recommends investors, however, buy the shares of Kohl's, as we see new fashion brands with competitive advantage. Given the recent weakness in the shares, S&P now views them as attractive. S&P recommends investors hold the shares of TJX. The company should benefit from its status as the largest U.S. off-price family-apparel and home-fashion retailer. Although this segment remains favorable, the shares appear fully valued at current levels. Q: Ken, how does S&P weight the various stock sectors going forward? A: Currently, S&P recommends an overweight stance on industrials, an underweight stance in consumer staples, and a market-weight recommendation across the other economic sectors. In essence, S&P is of the opinion that 2005 will truly be a stockpicker's market, meaning that there don't appear to be any obvious sector or asset-class opportunities at hand. The lack of leadership is likely to continue without material catalysts emerging in the highly visible technology, energy, or financial sectors. With financials now accounting for more than 20% of the S&P 500-stock index by market capitalization, much of the market outlook depends on how that sector performs this year. A flattening yield curve has led investors to be cautious on the sector, but a more sanguine forecast for interest rates and possibly a pickup in market activity could fuel good gains for the sector, which offers above-average dividend yields.
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