Markets & Finance

S&P Cuts Extreme Networks to Avoid


Extreme Networks (EXTR): Downgrading to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Mark Basham

EXTR is up about 25% since announcing fiscal year 2003 (June) results. Despite the expected announcement over the coming year of new products based on EXTR's Triumph next-generation chipset, we do not expect significant marketshare gains for the company and continue to see product pricing under pressure. EXTR remained free cash flow negative in fiscal year 2003, despite an 82% drop in capital expenditures. Reflecting an estimated intrinsic value of $3 to $5 derived from our discounted cash flow model, and the company's $202 million of net cash and securities, our 12-month target price is $5.

RealNetworks (RNWK): Reiterating 1 STAR (sell)

Analyst: Scott Kessler

RNWK this morning announced that its RealOne service would be available on Sprint PCS Vision wireless phones. Customers would be able to access such multimedia content as breaking news, stock-market reports, and sports highlights. We think that although this is a nice win for RNWK, material revenues from this and other wireless relationships are perhaps years away. With rising competition in its content businesses, particularly music, and stock at a notable premium to our 12-month target price of $4, based on discounted cash-flow analysis, we still recommend sell RNWK.

Sysco Corp. (SYY): Reiterating 5 STARS (buy)

Analyst: Joseph Agnese

SYY posts June-quarter EPS of 37 cents, vs. 31 cents a year ago, and 2 cents ahead of our estimate. Net sales grew 10.5%, reflecting 6.1% real growth, 2.5% food cost inflation, and 1.9% from acquisitions. Gross margin narrowed as SYY absorbed some of inflation-based cost increases. Margins were aided by efficiencies from acquisitions and technology improvements. We look for SYY to gain share within customers, and from competitors as it expands its customer base. At 21 times our calendar 2004 EPS estimate of $1.42, above peers but near the low end of its historical range, we at S&P believe this clear industry leader is undervalued.

MetLife (MET): Downgrading to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Catherine Seifert

MET shares are under pressure after the company restated its second-quarter operating EPS results, to 84 cents from 89 cents, reflecting certain expenses it describes as "improperly deferred" at its New England Financial unit. Although we are raising our overly conservative 2003 estimate by 10 cents, to $2.90, despite the restatement, we nevertheless share the market's concern that this raises questions about the quality of MET's internal controls. Our 12-month target price of $31, trimmed from $33, assumes MET shares trade at a greater discount to peers because of this uncertainty.

InterActive (IACI): Keeping 5 STARS (buy)

Analyst: Scott Kessler

IACI is lower this morning following an article in yesterday's New York Times about its disclosure, and the potential added occupancy tax liabilities associated with its Expedia and Hotels.com businesses. IACI responded with a press release this morning. We believe IACI's disclosures are as comprehensive as any in our Internet-company coverage. In terms of the tax issue, IACI is working with state and local governments, and has taken reserves to account for the near-term risk. Despite these matters, our target price remains $48, based on discounted cash flow analysis.

Countrywide Financial (CFC): Reiterating 4 STARS (accumulate)

Analyst: Erik Eisenstein

CFC posts July data that we see reflecting changes in the mortgage origination market after a rise in fixed rates. Loan fundings reached record $52 billion, which we believe is attributable to a paring down of CFC's pipeline, which fell from $82 billion to $70 billion. Application volume, though still historically high, also fell significantly. We continue to expect fundings to fall from here, and are leaving our 2003 EPS estimate at $14.26 and 2004's at $8.84. Despite difficult comparisons, we view CFC as attractive at a low p-e on our 2004 estimate relative to other financial companies.


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