http://www.businessweek.com/stories/2005-10-16/s-and-p-keeps-strong-sell-on-gm

Markets & Finance

S&P Keeps Strong Sell on GM


General Motors (STJ) : Reiterates 1 STARS (strong sell)

Analyst: Efraim Levy, CFA

GM posted a worse-than-expected third quarter, but announced a union pact that should generate about $4.35 per share savings before offsets. Cash savings might be $1 billion per annum. While we view the pact as good news, the full benefits would not occur in 2006 and could be partly offset by, in our view, weaker sales volume and mix, and potentially higher costs from Delphi's bankruptcy. The potential sale of some GMAC assets would likely generate cash and lower GMAC borrowing costs, but cut income contributions to GM. With likely savings from the union pact, our target price rises to $27 from $22.

Tobacco Sub-industry (RAI) : Remains Neutral

Analyst: Anishka Clarke

The U.S. Supreme Court rejected an appeal by the Justice Department that sought to reinstate the $280 billion disgorgement claim in its civil racketeering lawsuit against cigarette makers. This follows the rejection of a full court review by the D.C. circuit's U.S. Court of Appeals and the initial federal court ruling that barred the claim. We believe today's final ruling on the disgorgement lowers manufacturers' cash flow risk, and think a settlement otherwise in the case is possible. We reiterate our buy opinion on Altria (MO), and hold opinions on Reynolds (RAI) and Loews (CG).

St. Jude Medical (STJ) : Maintains 5 STARS (strong buy)

Analyst: Robert Gold

St. Jude posted third quarter operating earnings per share of 40 cents vs. 31 cents, in line with our forecast, and agreed to acquire Advanced Neuromodulation Systems (ANSI) for about $1.3 billion in cash, subject to approvals. We believe the deal would boost 2006 sales by about 5% and dilute 2006 earnings per share by 4 cents, but see the dilutive impact offset by strength in existing St. Jude operations. We expect earnings per share accretion by 2007 and think Advanced Neuromodulation Systems is an excellent strategic fit, with few product overlaps. The deal will be partly funded by $500 million cash on hand, including $160 million on Advanced Neuromodulation's balance sheet. Our 12-month target price remains $61.

Yahoo (YHOO): Maintains 4 STARS (buy)

Analyst: Zaineb Bokhari and Scott Kessler

An unconfirmed report in the Wall Street Journal said that Yahoo is in preliminary talks with Time Warner (TWX) to acquire a stake in AOL. We think Yahoo's interest makes strategic sense, although a purchase may be subject to regulatory scrutiny given the size and reach of the two web properties. We believe the combination of Yahoo's market leadership in terms of traffic, users and revenues, as well as its broad international footprint and growth characteristics, and AOL's expansive traffic, sizable registered user base and services and content, would be formidable.

Philips Electronics ADRs (PHG): Maintains 4 STARS (buy)

Analyst: H. Nasrallah

Third quarter evenue of $9.12 billion was 6% above our forecast, and income from operations of $530 million exceeded our $196 million estimate. The income outperformance reflected better sales than we expected in consumer electronics, in domestic appliance and personal care segment, and in semiconductors, as new products drove marketshare gains. LG Philips LCD contributed $228 million to net profit, vs. $40 million in the second quarter, on a rise in sale prices for liquid crystal displays, which we expect to flatten in thefourth quarter on weaker pricing for monitors. We are lowering our 12-month target price $3 to $28 to reflect recent dollar vs. euro rise.

Northeast Utilities (NU) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Justin McCann

Following a recent pullback in its share price, we believe Northeast Utilities is more fairly valued at an approximate peer p-e of 14.3 times our 2006 earnings per share estimate of $1.30. The stock had been trading as high as a 10% premium to peers. While the current 3.8% dividend yield is slightly below the approximate 4.0% of Northeast Utilities's peers, the 7.7% increase reflected in the September 30 payment has significantly narrowed the difference. While we are lowering our third quarter earnings per share estimate by a penny, to 32 cents, we are keeping our 2005 estimate of $1.15 and 12-month target price of $19.

Peoples Energy (PGL) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Yogeesh Wagle

With Peoples Energy shares down 11% thus far in October, we think they are now fairly valued. We expect the company to resume earnings growth in fiscal year 2007 (ending September) on rate hikes based on requested increases of $80 million to $100 million for Peoples Gas and of between $12 million and $15 million for North Shore. In fiscal year 2006, we see results pressured by rising labor costs and bad debt expense, and declining gas consumption. Based on our expectations for below-peer earnings per share growth, we believe the stock should trade at a p-e multiple of 14.6 times projected fiscal year 2006 earnings per share, a 9% discount to the peer average. On that basis, our 12-month target price stays $38.

First Horizon National (FHN) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Richard Tortoriello

Third quarter earnings per share of 90 cents vs. 89 cents is 3 cents above our estimate. We expect capital markets results, which fell 81%, to improve, as we see rising rates attracting money to the bond market. With First Horizon National trading at 14 times average 7-year earnings per share, compared to a peer average of 23 times, and with First Horizon National's current yield of 4.6% compared with peers' 2.9%, we believe its high mortgage exposure is more than adequately discounted. Our 2005 earnings per share estimate falls by 3 cents to $3.39, and our 2006 by 9 cents to $3.62, to account for potential slowing in mortgage banking. Our target price falls by $2 to $42, due to our earnings per share cuts.

Saks (SKS) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Jason Asaeda

Saks reported a July quarter operating loss of 34 cents vs. 19 cents loss, 15 cents wider than our loss estimate. The shortfall reflects clearance markdowns, a temporary decline in vendor markdown support, and investment spending in the Saks Fifth Avenue Enterprises segment. However, we expect better inventory management, expense controls, and more normalized vendor relations to support stronger results at the Saks Fifth Avenue Enterprises segment going forward. We are cutting our fiscal year 2006 (ending January) operating earnings per share estimate by 15 cents to 47 cents, but raising our discounted cash flow-based 12-month target price by $2 to $18 on our improved outlook.


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