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Get Four
|  | AUGUST 23, 2004
 S&P STOCK PICKS & PANS S&P Cuts Sports Authority to Hold Also: analysts' opinions on Toys R Us and FedEx. Plus more Sports Authority (TSA ): Downgrades to 3 STARS (hold) from 2 STARS (avoid) Analyst: Mark Basham The weak August sales outlook from Wal-Mart is weighing on retailers in general. We think Sports Authority, as the most leveraged of the major sporting-goods retailers, is particularly vulnerable. We think prolonged weaker-than-expected retail sales trends could cause its ongoing store remodeling program to be delayed and to cost more. Also, with 45 stores in Florida, Hurricane Charley could especially weigh in the October quarter. We're lowering our fiscal 2005 (Jan.) earnings per share estimate to $1.45 from $2.10, and fiscal 2006's to $1.85 from $2.70. Our discounted-cash-flow-based 12-month target price falls from $29 to $17. Toys R Us (TOY ): Maintains 3 STARS (hold) Analyst: Yogeesh Wagle Toys R Us posted July-quarter earnings per share of 28 cents, vs. a loss of 5 cents, after a $200 million tax reserve reversal, above our 1-cent loss estimate. Sales shrank 3.9% as Kids R Us store closings and a 7.7% comparable-store sales drop in U.S. toy operations outweighed gains at the Babies R Us and international divisions. With the company considering the possible sale of its toy business, as well as a spin-off of Babies R Us, and poised, in our view, for a more profitable holiday season, we see merit in holding the retailer. Our 12-month target price is $18. FedEx (FDX ): Maintains 5 STARS (buy) Analyst: James Corridore FedEx says it sees August-quarter EPS of $1.00 to $1.10, up from the previous guidance of 90 cents to $1.00. It sees $4.40 to $4.60 for fiscal 2005 (May), vs. the previous guidance of $4.20 to $4.40. The package-delivery company says it's seeing strong demand for international express, ground and less-than-truckload trucking services. We're raising our fiscal 2005 EPS estimate to $4.55 from $4.35, but keeping our fiscal 2006 estimate at $5.15, above the Street's $4.93 view. Our 12-month target price remains $106, valuing FedEx at 23 times our 2005 estimate and and 21 times our 2006 EPS estimates. This means shares trade at a discount to United Parcel and in the middle of FedEx's historic p-e range. Verizon Communications (VZ ): Maintains 5 STARS (buy) Analyst: Todd Rosenbluth As expected, the FCC released short-term rules that freeze the wholesale rates that regional bell operating carriers charge competitors for six months. We're skeptical that permanent rules can be agreed upon, given the uncertain tenure of the commissioners. With the absence of new rules, rates will rise 15% for existing wholesale customers and even higher for new customers, regardless of market impairment. We view the FCC ruling as positive for the RBOCs but we still see challenges by cable and wireless concerns. We see Verizon as having the best earnings prospects of the RBOCs, given its wireless and expense control. Cisco Systems (CSCO ): Accumulate 4 STARS (accumulate) Analyst: Megan Graham-Hackett Market research firm the Dell-Oro Group released second-quarter 2004 market share figures, which showed Cisco ceded share back to Juniper Networks in the low and mid-range router market, but gained in the high end. Cisco mostly held its market share steady in the Layer 2 and 3 switched ethernet market, but its share was squeezed in the significantly smaller Layer 4 through Layer 7 market. Dell-Oro overall is looking for 18% growth in ethernet switches in 2004 and 9% growth in routers. With few surprises in report, we're keeping our Cisco 12-month target price of $25, based on discounted cash-flow analysis.  All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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