Markets & Finance

S&P Ups RF Micro to Accumulate


RF Micro Devices (RFMD): Upgrades to 4 STARS (accumulate) from 2 STARS (avoid)

Analyst: Thomas Smith

RF Micro raised its revenue, gross margins, and earnings outlook for the September quarter. The wireless-communications chipmaker sees "robust" customer activity, which S&P says corresponds to upbeat statements from other chipmakers in recent days. S&P is raising its estimates to earnings per share of 2 cents for fiscal 2004 (Mar.) from a loss per share of 7 cents, and to earnings per share of 32 cents for fiscal 2005 from earnings per share of 18 cents. Based in part on applying the price to the trailing 12-month sales multiple of 3.4 (near peers) to the estimated forward-year sales of $3.37, S&P's 12-month target price is $12 a share.

Foundry Networks (FDRY): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Megan Graham Hackett

While second-quarter 2003 industry data continues to support S&P's thesis that enterprise demand would improve for networking gear in the second half of 2003, S&P sees recent anecdotal evidence that an uptick in carrier market demand has occurred earlier than expected. With new products from Foundry, its solid U.S. government business, and in light of Foundry's execution during the industry's downturn, S&P believes the company could be a major beneficiary of the broader upturn in demand. Based on S&P's price-sales analysis and discounted cash flow model, S&P is establishing a 12-month target price of $25.

Cisco Systems (CSCO): Maintains 5 STARS (buy)

Analyst: Megan Graham Hackett

As noted with Foundry Networks, S&P sees recent anecdotal evidence that an uptick in carrier market demand has occurred earlier than expected. S&P says its Cisco estimates had reflected normal seasonal patterns regarding sequential sales growth over the next two years, which S&P now believes could prove too conservative. S&P is raising the 12-month target price for Cisco to $25, from $23, based on S&P's revised discounted cash flow and price-sales analyses. S&P revised discounted cash flow analysis reflects stronger cash flow growth.

Fannie Mae (FNM): Reiterates 4 STARS (accumulate) and Freddie Mac : Reiterates 2 STARS (avoid)

Analyst: Erik Eisenstein

According to Monday's Wall Street Journal, the Bush Administration is "likely" to recommend shifting Fannie Mae and Freddie Mac's oversight to the Treasury, consistent with several congressional proposals, "but offer big concessions to win the companies' support", possibly including a five-year moratorium on new capital standards. Treasury Secretary Snow is expected to testify before Congress on Wednesday. If true, S&P would view this as a mild positive for the mortgage financiers, confirming S&P's belief, absent a significant widening of the Freddie Mac controversy, that they will escape relatively unscathed.

Boeing (BA): Maintains 5 STARS (buy)

Analyst: Robert Friedman

Despite the U.S. Senate Arms Services Committee's decision to bounce the $21.2 billion Air Force tanker lease proposal back to the Pentagon for further review, S&P continues to maintain the $45 per share intrinsic value-based 12-month target price on Boeing. S&P is comfortable maintaining the $45 a share fair value appraisal, and has already baked in the 10-year return-on-equity and free cash flow compound annual growth rate assumptions, as well as the mediocre growth prospects and economics of Boeing's commercial and military businesses. Boeing is trading at an 18% discount to S&P's appraisal.

Tenet Healthcare (THC): Reiterates 2 STARS (avoid)

Analyst: Frank Connelly

The Senate Finance Committee's announcement, late Friday, of an investigation into Tenet's corporate governance practices, comes on the heels of the Health & Human Services Department's action to seek to bar Tenet's Redding Medical Center from Medicare, on Thursday. Both were largely unexpected, and both highlight S&P's view of the continued risk to Tenet shares from possible legal action from the federal government, shareholders, and now any findings or fallout from the Senate's inquiry. At 15 times S&P's 2004 earnings per share estimate, shares are trading in line with peers, yet S&P thinks Tenet shares have a greater risk.

Caterpillar (CAT): Maintains 3 STARS (hold)

Analyst: James Sanders

After attending Caterpillar's analyst meeting, S&P is more confident that the company, a Dow-component, will achieve its revenue target of $30 billion. By S&P's estimates, Caterpillar will likely reach this level closer to the end of the decade, which implies a 6% to 6.5% sales compound annual growth rate (in line with its most recent ten-year average annual growth rate). Moreover, recent price increases should result in enhanced profitability. S&P is raising the 2003 and 2004 estimates to $3.02 and $4.25, from $2.87 and $3.50. With shares trading at a slight premium to S&P's 12-month target price of $68, S&P would hold this maker of industrial machines.

Andrx (ADRX): Reiterates 4 STARS (accumulate)

Analyst: Herman Saftlas

Andrx settled patent litigation with Pfizer and Alza (part of Johnson & Johnson), which S&P expects will enable Andrx to market its generic versions of Pfizer's Glucotrol XL diabetes drug (branded sales of $297 million in 2002). The settlement calls for Andrx to pay Alza royalties, and for Pfizer to supply Andrx with the product. S&P views Andrx's pipeline as robust, with over 30 new generics, including one for the Wellbutrin SR antidepressant. S&P is raising Andrx's 12-month target price by $3, to $27, derived by applying the average specialty drug p-e to S&P's new 2004 estimate of $1.35.

Janus Capital Group (JNS): Maintains 3 STARS (hold)

Analyst: Robert McMillan

Janus announced measures to address "market timing" trading issues raised by the New York Attorney General, including reimbursing shareholders if an independent auditor determines they suffered losses due to improper trading practices. Current information suggests that total investments by these market timers were less than one-half of 1% of Janus assets, which were about $150 billion at the end of July. S&P feels the news should help allay some concerns. S&P's estimates of 89 cents and $1.16 for 2003 and 2004 are unchanged. S&P's 12-month target price of $18 assumes a forward p-e of 17.


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