Markets & Finance

S&P Says Buy Microsoft


Microsoft (MSFT): Reiterates 5 STARS (buy)

Analyst: Jonathan Rudy

Microsoft announced Friday that it will double its annual dividend to 16 cents, from 8 cents. With an anticipated dividend yield of 0.6%, based on Friday's price, Microsofy will have one of the highest yields in S&P's Systems Software Sub-Industry. Additionally, Microsoft's monthly free cash flow generation, which S&P calculates at about $1 billion per month, is more than sufficient to handle the expected annual cash outflow of $1.7 billion to cover the new dividend level. Based on S&P's discounted cash flow analysis, the 12-month target price is $32.

Alcan (AL): Reiterates 4 STARS (accumulate)

Analyst: Leo Larkin

Alcan's shares are up following news that French aluminum and aluminum-products company Pechiney has accepted Alcan's third buyout offer, which consists of 48.50 euros in cash and shares per Pechiney share. Alcan increased its initial July 7 offer of 41 euros in cash and stock to 47 to 48 euros on September 2, but it was rejected by Pechiney. The deal is valued at roughly $4.4 billion. Pechiney's board of directors agreed to the offer, but proposed merger is still subject to regulatory approval. S&P believes this deal would be positive for the industry and for Alcan, since more production capacity in fewer hands should improve price discipline. S&P doesn't think a third party will top Alcan's offer.

CDW Corp. (CDWC): Reiterates 4 STARS (accumulate)

Analyst: Amrit Tewary

S&P is adjusting its earnings model following CDW's recent purchase of certain North American assets of Micro Warehouse. S&P believes the acquisition will be accretive to earnings per share by 2 cents in 2003 and 14 cents in 2004. Accordingly, S&P is adjusting the earnings per share estimate for 2003 to $2.21, from $2.19, and for 2004 to $2.63 from $2.49. At 25 times S&P's revised 2003 earnings per share estimate, shares are at a premium to the S&P 500's p-e but in line with CDW's historical average multiple of 25. S&P's 12-month target price of $66 is derived by applying a p-e of 25 times to the revised 2004 earnings per share estimate.

Oracle (ORCL): Maintains 3 STARS (hold)

Analyst: Jonathan Rudy

August-quarter operating earnings per share of 8 cents, vs. 7 cents, is in line with S&P's estimate, but a 2% rise in revenues is below S&P's expectations. S&P was disappointed by a 7% decline in new license sales, and a 6% decrease in the Americas region. But, operating margin remained strong at 30%, and cash/investments stood at over $7.6 billion. S&P is maintaining the fiscal 2004 (May) earnings per share estimate of 46 cents. Uncertainty about Oracle's offer for PeopleSoft continues. But with S&P's view of solid profitability and a strong balance sheet, S&P would hold Oracle shares. Based on S&P's discounted cash flow analysis, the 12-month target price is $14.

Abercrombie & Fitch (ANF): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Michael Driscoll

S&P regards Abercrombie shares as attractive for purchase, at 11 times S&P's fiscal 2005 (Jan.) earnings per share estimate of $2.51. S&P is that concerned same-store sales may be negative in the near term at core Abercrombie & Fitch stores as the company executes a non-promotional branding strategy, though S&P believes prevailing valuation eases risk. S&P expects a turn in same-store comparison to positive over the next six months and thinks patient investors will be rewarded. S&P is confident in Abercrombie's ability to protect brand equity and margins, as well as develop new retail concepts. S&P's 12-month target price is $35, which is 14 times the fiscal 2005 estimate.

Ameritrade (AMTD): Maintains 3 STARS (hold)

Analyst: Robert McMillan

Ameritrade preannounced for the September quarter, projecting earnings per share in the middle to upper end of previous guidance of 6 cents to 14 cents. For fiscal 2004 (Sept.), it expects 27 cents to 53 cents. S&P is leaving the earnings per share estimates for fiscal 2003 and fiscal 2004 unchanged at 31 cents and 46 cents, respectively. Ameritrade is benefitting from continued strength in the stock market, which S&P expects to continue. Trading activity to date in September is up about 30% over August's 137,000 average daily trades. With its premium valuation and susceptibility to market gyrations, S&P would not add to positions in Ameritrade. S&P's 12-month target price is $15.


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