S&P Ups McDonald's to Strong Buy

Plus: Analyst opinions on Google, Yahoo, GE, Merck, and Midwest Air Group

From Standard & Poor's Equity Research

McDonald's (MCD)

Ups to 5 STARS (strong buy) from 4 STARS (buy)

Analyst: Mark Basham

Global comparable sales rose 8.2% in March and 6.3% for Q1, and McDonald's s now forecasts first quarter earnings per share (EPS) of $0.62. U.S. comparable sales rose 4.4% for the first quarter. Prior to the stronger-than-expected March sales, we saw first quarter global comparable sales increasing by 5.5%. We are lifting our first quarter EPS estimate by $0.05 to $0.62, full-year 2007's by $0.08 to $2.78, and 2008's by $0.10 to $3.05. We are raising our target price by $5 to $58, implying a 22% upside. Also, we think McDonald's U.S. performance tends to weaken competitors' stance that poor weather was to blame for their weak first quarter sales.

Google (GOOG)

Reiterates 3 STARS (hold)
Analyst: Scott Kessler

Google is scheduled to report first quarter results after the market close on Thursday, April 19. We project gross revenues of $3.65 billion and EPS of $2.86, and believe they translate as modestly higher than those of the Street, which estimates net revenues and EPS excluding stock-based compensation. Google's continuing marketshare gains support our first quarter estimates. However, we believe margins in the first quarter and going forward could be restrained by large distribution deals, content-related payments, and expenses related to YouTube. At 40 times our 2007 EPS estimate, we see Google as reasonably valued.

Yahoo (YHOO)

Reiterates 2 STARS (sell)

Analyst: Scott Kessler

Yahoo will report first quarter results after the market close on Tuesday, Apr. 17. We see revenues of $1.2 billion and EPS of $0.11, roughly in line with the Street consensus. We believe the Panama search technology upgrade aided search-related metrics and financial results. However, we think the near-term benefits of Panama are perhaps being overestimated at this point. We are optimistic about the newspaper consortium and the recent Viacom win, but see Yahoo's display business facing pressure from social media. We think the company's shares are overvalued at 54 times our 2007 EPS estimate.

General Electric (GE)

Reiterates 5 STARS (strong buy)

Analyst: Richard Tortoriello

GE believes losses from its subprime U.S. mortgage business were largely contained in first quarter, and we expect growth at GE Money, which includes that business, to be strong for the full year. We also expect growth in the healthcare segment to improve significantly in 2007, look for continued double-digit growth in infrastructure and in commercial finance, and see slow improvement at NBC Universal. We look for positive results in industrial once plastics are divested, with the deal expected to close in the third quarter. We forecast 11% EPS growth in 2007, 13% in 2008, and see GE undervalued at 14 times our 2008 EPS estimate of $2.50.

Merck (MRK)

Reiterates 4 STARS (buy)

Analyst: Herman Saftlas

Merck raises 2007 guidance for the second time since January, and now expects first quarter EPS at 84 cents before restructuring charges, 20 cents above S&P and Street expectations. Its sees full 2007 EPS at $2.75-$2.85. We attribute the better results to sales strength across the board, and robust uptake of new products such as Gardasil and Januvia. Regarding Vioxx, a judge recently dismissed a class action suit. We are raising our 12-month target price by $6, to $55, which applies a peer-level p-e of 18 times to our $3.05 EPS estimate for 2008. Merck's $1.52 dividend is yielding 3.0%.

Midwest Air Group (MEH)

Downgrades to 2 STARS (sell) from 3 STARS (hold)

Analyst: Jim Corridore

Midwest again rejects a buyout bid from AirTran (AAI), saying $9 cash and 0.5842 AirTran share for each Midwest share is inadequate. We think AirTran is unlikely to raise its offer much further, and see risk to Midwest shares if AirTran drops the offer. For a standalone company, we think Midwest is overvalued at about 12 times our 2007 estimate of $1.25. We think a newly capitalized Northwest Airlines could attempt to regain share in Midwest's markets, which could cause the company to underperform the industry in traffic and revenue growth. We are cutting our 12-month target price by $4 to $11, a below-peers 9 times our 2007 estimate.