S&P Upgrades XM Satellite Radio to Hold

Analyst Tuna Amobi notes the company's deal with Sirius. Plus: comments on Alltel, E*Trade, and more

From Standard & Poor's Equity Research

XM Satellite Radio (XMSR): Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analyst: Tuna Amobi

As recently speculated, XM Satellite Radio and Sirius (SIRI) agree to a $13 billion merger of the rival satellite radio providers. Each XM share would get 4.6 shares of Sirius, whose CEO Karmazin would lead new entity, with XM Chairman Parsons keeping his title. While the deal is billed as a merger of equals, we see an effective takeover of XM by Sirius. But with this duopoly merger likely perceived by many in Washington as anti-competitive, we see little worse than 50/50 odds of closing by 2007 end, as expected. Still, we raise our target price by $7 to $20 on the fixed exchange ratio.

Alltel (AT): Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analysts: Ari Bensinger and Kenneth Leon

Alltel posts fourth quarter EPS of $0.63 vs. $0.40, before special items, a penny above our estimate. The fourth quarter showed an improvement in net subscriber adds at 228,000, and net service revenues grew 12%. EBITDA margins at 32.9%, compared to 30.6% a year ago, benefited from lower customer churn, lower Selling General & Administrative expenses and costs of service. We are raising our 2007 EPS estimate to $2.95 from $2.90. Applying an enterprise value of 7.9 times to our 2007 EBITDA estimate, we are raising our 12-month target price to $66 from $56.

E*Trade Financial (ETFC) : Reiterates 5 STARS (strong buy)

Analyst: Matthew Albrecht

E*Trade announces it plans to open a global trading platform in the second quarter, which would allow clients to trade foreign stocks and currencies online in local currencies in six major international markets. The company plans to eventually expand the program to include 42 total markets and currencies. We believe the move makes sense in the scope of E*Trade's plans to attract mass-affluent investors and retain its attractiveness to traders, and we expect it to aid the company's trading volume growth. We are keeping our 12-month target price at $30, 17 times our 2007 EPS estimate, a discount to peers.

Rare Hospitality International (RARE) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Mark Basham

Fourth quarter EPS of $0.46 vs. $0.42 from continuing operations is well above our $0.42 estimate on strong performance in The Capital Grille segment. We see average 12% expansion of both Rare's Longhorn Steakhouse and Capital Grille chains over the next several years, with adequate capital in place, including cash and borrowing capacity. For 2007, we are lowering our EPS estimate $0.08 to $1.65, reflecting timing of price and costs increases for beef, as well as some severe first quarter weather. On stronger growth in cash flows over long term, we are raising our target by $3 to $41.

Wal-Mart Stores (WMT) : Reiterates 4 STARS (buy)

Analyst: Joseph Agnese

January quarter operating EPS of $0.93 vs. $0.84 is $0.03 above our estimate. Results benefited from square foot expansion plus improved labor and inventory productivity, despite increased markdowns and advertising expenses. We now expect disruptions from remodeling in fiscal year 2008 (ending Jan.) to be less than we originally projected, since Wal-Mart plans to complete only 325 full remodels by the end of the Oct. quarter, down about 10% from its original plan. As a result, we are raising our fiscal year 2008 EPS estimate $0.04 to $3.21, and our 12-month target price rises $2 to $55.

KongZhong (KONG) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Jim Yin

KongZhong ADSs have appreciated about 23% in the past two weeks, and 8% today. We are not aware of any development to explain the price movement, but we believe it could be related to the upcoming release of fourth quarter results, which the company plans to announce after the market closes on March 1. We see revenue declining by 5%, year over year, but we expect it to reaccelerate in the first half of 2007. We are maintaining our 12-month target price of $9.