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Get Four
|  | JANUARY 25, 2005
 S&P STOCK PICKS & PANS IAC/InterActive Cut to Sell S&P is increasingly negative on the company's Internet travel business. Plus analysts' opinions on PalmOne, Merrill Lynch, and more IAC/InterActive Corp. (IACI ): Downgrades to 2 STARS (sell) from 3 STARS (hold) Analyst: Scott Kessler We have become increasingly negative on Internet travel, which accounts for a considerable percentage of IAC's revenues and profits. We are concerned about mounting competition from online agencies, travel suppliers, and travel search companies. We also see potential margin pressures, in part due to rising marketing expenses. Airline industry consolidation, which we expect to occur this year, would likely hurt bookings and revenues. We are cutting our 2005 earnings per share estimate to $1.01 from $1.08. Based on intrinsic analysis, we are lowering our target price to $22 from $28. PalmOne (PLMO ): Downgrades to 1 STAR (strong sell) from 3 STARS (hold) Analyst: Megan Graham-Hackett PalmOne announced its CEO Todd Bradley is resigning, effective at end of February. President Ed Colligan, formerly President and COO of Handspring Inc., will serve as the interim CEO. In our view, the absence of a CEO as smartphone competition has heated up with new entries coming to market this year from a variety of vendors could cause PalmOne's execution and product momentum to be at risk. We believe that under such a scenario the stock's price-to-sales multiple could contract to below 1 time. We have consequently lowered our target price to $23 from $34 to incorporate what we view as a higher risk profile. NetFlix (NFLX ): Downgrades to 2 STARS (sell) from 3 STARS (hold) Analyst: Amy Glynn, CFA NetFlix shares were up over 6% on Jan. 25, after the previous day's fourth-quarter EPS report that essentially met targets. We think a lower churn rate of 4.4% might have given investors what we see as a false sense of confidence with regard to the impact of 2-STARS ranked Blockbuster's (BBI ) aggressive pricing actions taken in the fourth quarter. We see an increased likelihood that a price war will continue in 2005, further eroding industry profitability. We are widening our 2005 net loss estimate to 18 cents from 10 cents. We are also trimming our 12-month target price by $2 to $10. Merrill Lynch (MER ): Reiterates 4 STARS (buy) Analyst: Robert Hansen, CFA Merrill Lynch posted fourth-quarter earnings per share of $1.19, vs. $1.19, above our $1.10 estimate. Results were aided by trading volumes, strong debt and equity revenues, and higher investment banking gains. We expect Merrill Lynch to benefit from increased merger and acquisition, and IPO activity in 2005. We are increasing our 2005 earnings per share estimate to $5.00 from $4.70, reflecting lower expense ratios. We are raising our 12-month target price to $68 from $60, or nearly 14 times our 2005 earnings per share estimate, comparable to peers and to Merrill Lynch's average multiple. We see improving fundamentals and view valuation of shares as attractive. BellSouth (BLS ): Upgrades to 2 STARS (sell) from 1 STAR (strong sell) Analyst: Todd Rosenbluth Following BellSouth's fourth-quarter conference call, we are modestly adjusting our 2005 projections by increasing our wireline revenue expectations on DSL gains but lowering our wireless revenue outlook on discounted family plans. We see consolidated EBITDA margins narrowing in 2005 to 36% from 40% in 2004. We forecast 2005 operating earnings per share of $1.47, after 8 cents of integration costs. While we still think the shares are overvalued relative to peers, and see wireless integration challenges, we believe downside is somewhat limited by BellSouth's 4% dividend yield. Our target price is $24. American Express (AXP ): Maintains 3 STARS (hold) Analyst: Evan Momios, CFA American Express posted fourth-quarter earnings per share of $0.71 vs. $0.60, a penny above our estimate. Strong cardmember spending, stable credit quality, and a lower tax-rate boosted earnings. We are raising our 2005 and 2006 operating earnings per share estimates by 5 cents to $3.10 and $3.45, respectively, on the strong cardmember spending momentum. In our view, American Express's global consumer franchise can continue to generate above-average returns on capital in 2005, but we think its stock is in the fair value range. Our 12-month target price remains $56, based on our historical p-e and historical price-to-book value analyses. International Business Machines (IBM ): Reiterates 5 STARS (strong buy) Analyst: Megan Graham-Hackett IBM announces plans to buy Corio for $182 million in cash, or $2.82 per share, pending approvals. We believe the acquisition of an enterprise application management services platform would flesh out IBM's strategy in on-demand offering. We view the price as fair, at 2.4 times Corio's expected 2005 revenues, based on estimates by Multex. We expect IBM to pursue small acquisitions in 2005 as it uses a strong cash position to add to its portfolio to further differentiate itself from peers. With shares trading below our discounted-cash-flow-derived $115 12-month target price, we view IBM as attractive. Johnson & Johnson (JNJ ): Reiterates 4 STARS (buy) Analyst: Robert Gold Excluding charges and fourth-quarter operating earnings per share of 67 cents, vs. 57 cents (including $789 million for taxes for planned repatriation of foreign earnings) is 4 cents above our estimate. We think the upside was mainly tied to strong drug sales and significantly wider gross margin. Device sales gain of 9.0% was in line, as Cypher comparisons suffered from U.S. competition. Free cash flow totaled $9.0 billion for 2004, and we think continued free cash flow strength, along with overseas earnings repatriation, provides a host of strategic options for 2005. We are boosting our 2005 earnings per share estimate by 5 cents to $3.40. Our target price is $70. Altera (ALTR ): Reiterates 3 STARS (hold) Analyst: Amrit Tewary Altera posted fourth-quarter earnings per share of 15 cents, vs. 12 cents, 2 cents above our estimate. Sales fell 9.3% from the third quarter, compared with our forecast of down 11%. Gross margin rose to 39.8%, a level we see as unsustainable. We expect first-quarter sales to rise 2% from fourth-quarter on a modest recovery in the communications markets. However, we see first-quarter operating margin narrowing 350 basis points from the fourth quarter, mainly on a large increase in research and development, and selling, general and administrative costs. We are cutting our first-quarter earnings per share estimate to 13 cents from 14 cents, and full 2005 to 61 cents from 66 cents. We are reducing our 12-month target price $3 to $20, based on our p-e and price-to-sales analyses. Brocade Communications (BRCD ): Reiterates 3 STARS (hold) Analyst: Richard Stice, CFA Brocade announces that Michael Klayko has been named CEO, replacing Greg Reyes, who had held the position since 1998. Mr. Klayko was most recently Brocade's vice president of sales. In addition, the company completed its previously announced audit related to accounting of stock-based compensation expense. The restatements include a fiscal 2004 (ending October) non-cash charge of $30 million. We are encouraged by Brocade's moves to, in our view, quickly rectify internal procedures. However, given what we view as intensifying competitive pressures in the data storage switch market, we would not add to positions.  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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