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Get Four
|  | MARCH 17, 2005
 S&P STOCK PICKS & PANS S&P: Strong Buy on FedEx Plus analysts' opinions on Toys 'R' Us, Qwest, Viacom, and more FedEx (FDX ): Reiterates 5 STARS (strong buy) Analyst: Jim Corridore February-quarter earnings per share of $1.03, vs. 68 cents, beat our estimate. Domestic express volumes grew 6%, while international express volumes grew 12%, and we view both gains as strong. Operating margins at express, ground and freight segments improved 190, 80 and 130 basis points, respectively. FedEx guides for May-quarter earnings per share of $1.40 to $1.50, compared with our $1.45 estimate. We are upping our fiscal 2005 (ending May) estimate a dime to $4.76, keeping fiscal 2006 at $5.50, and our 12-month target price remains $132 on a blend of relative p-e and our discounted-cash-flow model. We have a strong buy opinion on the stock. Toys 'R' Us (TOY ): Maintains 3 STARS (hold) Analyst: Michael Souers According to unconfirmed reports in the Wall Street Journal and the New York Times, Toys 'R' Us has accepted a buyout offer of $5.7 billion from a group consisting of Kohlberg Kravis Roberts, Bain Capital and Vornado Realty Trust. The Journal said that the consortium would likely sell some of the chain's stores to other retailers, but would continue operating those that remain under the Toys 'R' Us and Babies 'R' Us names. Our 12-month target price remains $27, and we expect an official announcement from Toys 'R' Us regarding this potential deal later this morning. Qwest Communications (Q ): Maintains 2 STARS (sell) Analyst: Todd Rosenbluth As expected, Qwest has raised the cash component of its bid for MCI by 15%. We see this as an effort to break up the agreed upon deal by Verizon Communications to merge with MCI, which is awaiting necessary approvals. MCI plans to review the new offer and respond by Mar. 28. If MCI accepts Qwest's higher offer, Verizon will be granted an opportunity to respond. We believe that, unlike Verizon, Qwest lacks the cash flow generation to be bidding against itself. But we also believe that Qwest faces significant challenges as a standalone entity. Viacom (VIA.B ): Reiterates 3 STARS (hold) Analyst: Tuna Amobi, CFA, CPA Shares were up 8% yesterday, rising sharply in late trading as CEO Redstone alludes to possible split into two public companies with different growth profiles, separately led by present co-COOs Freston and Moonves. One would have MTV Networks and other operations, the other would have CBS, Infinity radio and outdoor advertising. CEO sees the plan as consistent with orderly succession, while providing acquisition currency. The news was not surprising, as shares have lagged on radio concerns, with the fourth quarter also marked by a $18 billion write-down of radio and outdoor assets. We would hold Viacom shares. Fannie Mae (FNM ): Reiterates 2 STARS (sell) Analyst: Gregory Simcik, CFA According to unconfirmed Wall Street Journal reports, OFHEO investigators found instances of Fannie Mae employees falsifying accounting ledger signatures and improperly changing records in earnings database systems and is sharing this information with legal authorities. We think last week's agreement between Fannie Mae and the OFHEO, to prohibit falsifying signatures and unauthorized database access, may be related. We are lowering our 12-month target price to $53 from $57 on a lower multiple of 7.1 times our $7.50 2005 earnings per share estimate, as we see higher risk with ongoing investigations. American International Group (AIG ): Maintains 3 STARS (hold) Analyst: Catherine Seifert AIG says it will delay filing its 10-K annual report because of recently announced management changes and its internal review of how it accounted for certain transactions. Although this news was expected, we believe there is now greater concern that AIG may have to restate earnings. We continue to believe that the lack of near-term visibility could pressure the shares, but hold the view that ultimate resolution of the issue will provide AIG with a powerful catalyst. Nevertheless, we are trimming our target price $2, to $70, or 13.5 times our 2005 earnings per share estimate, closer to peer average. eBay (EBAY ): Reiterates 3 STARS (hold) Analyst: Scott Kessler A federal court yesterday affirmed a ruling that eBay fixed-price functionality infringes private company MercExchange's patent. Although the court also did not enforce a patent involving e-commerce searches, resulting in a reduction of damages to $25 million from $29.5 million, it revived a prior claim relating to online auctions. The indicated damages cover the period through first-quarter 2003. Based on a recent conversation with MercExchange and our calculations, we think damages could rise by roughly $100 million for the period secon-quarter 2003 to fourth-quarter 2004. We also think an injunction on eBay's Buy It Now is possible. GM (GM ): Reiterates 2 STARS (sell) Analyst: Efraim Levy, CFA GM warns that it will miss its first quarter and full 2005 expectations and is now forecasting a first-quarter loss of about $1.50 and full year earnings per share of $1 to $2. New guidance reflects lower production volume, competitive pricing, and a weaker sales mix. While visibility on GM earnings was poor, the magnitude of the shortfall is very disappointing to us. We are cutting our first-quarter estimate to a loss of $1.45 from earnings per share of 14 cents, our full 2005 earnings per share estimate to 50 cents from $3.85, and our 2006 earnings per share estimate to $4.00 from $4.96. We are also cutting our 12-month target price to $26 from $32, based on a combination of discounted cash-flow and p-e analyses. JPMorgan Chase (JPM ): Reiterates 4 STARS (buy) Analyst: Evan Momios, CFA We believe that news of JPMorgan's agreement to settle its WorldCom class action litigation will have a positive impact on the valuation of its stock. Despite the expected $560 million after-tax charge to first-quarter 2005 earnings per share, we think market participants will view the settlement positively, as reducing future uncertainty and investment risk. We are keeping our 2005 and 2006 operating earnings per share estimates at $3.20 and $3.50, and our 12-month target price of $43, or approximately 12.3 times our 2006 operating earnings per share estimate, compared to the current price at 11.3 times our 2005 estimate. Vornado Realty Trust (VNO ): Reiterates 3 STARS (hold) Analyst: Raymond Mathis Unconfirmed media reports indicate that Vornado, along with its joint venture partners, were the successful bidders to buy Toys R Us for an estimated $5.7 billion. We view the possibility of such a pending acquisition as positive, as Vornado has had a successful track record of buying troubled retailers and exploiting the real estate asset value. We will update as details emerge.  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.
BW MALL
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