Markets & Finance

S&P Ups JP Morgan, Bank One to 'Accumulate'


JP Morgan Chase (JPM): Upgraded to 4 STARS (accumulate) from 2 STARS (avoid); Bank One (ONE): Upgraded to 4 STARS (accumulate) from 2 STARS (avoid)

Analyst: Mark Morgan, CFA

Our upgrade of JP Morgan is based on its announced acquisition of Bank One, which was also upgraded on Jan. 15. The deal calls for a swap of 1.32 JPM shares per ONE share, and is expected to close in mid-2004, subject to necessary approvals. We are reducing our 2004 earnings per share estimate to $3.00 from $3.05, based on expected dilution from the deal, and look for 2005 EPS of $3.40. We are raising our 12-month target price to $44 from $31, based on 13 times our 2005 estimate, in line with peer average, and reflecting our view that JP Morgan's earnings will become less volatile.

IBM Corp. (IBM): Reiterates 5 STARS (buy)

Analyst: Megan Graham-Hackett

Big Blue posted fourth-quarter earnings per share of $1.56, vs. $1.34 one year earlier, above our $1.51 estimate. Revenues rose 9% (1% in constant currency) to $25.9 billion, beating our $23.7 billion estimate as hardware revenues, up 12%, were $2 billion above our model. We believe EPS quality is solid, as gross margin beat our projection in hardware, services, and software. Services signings of $17.3 billion were well ahead of our estimate. While we still expect 2004 earnings per share at $4.86, IBM sees business demand improving. With market share gains, we think our forecasts could be conservative. Our 12-month target price remains $113, based on our

discounted cash-flow (DCF) model.

Yahoo! (YHOO): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

The Internet-media outfit posted fourth-quarter earnings per share of 11 cents vs. 8 cents one year earlier, 1 cent below our forecast but in line with the Street. Revenues grew 79%, before traffic acquisition costs. Excluding these costs, and revenues from the 2003 acquisitions of Inktomi and Overture Services, growth was 40%. We expect Yahoo! to benefit from a rebound in online advertising and from cost cuts related to Overture. We are raising our 2004 earnings per share estimate by 5 cents to 60 cents, and setting a 2005 estimate of 75 cents. We are also boosting our DCF-derived 12-month target price by $5, to $51. We think Yahoo! is fairly valued at these levels.

McDonald's (MCD): Reiterates 3 STARS (hold)

Analyst: Dennis Milton

McDonald's December-quarter systemwide sales increased 17%, mainly on strong same-store sales gains in the U.S. and translation effects from a weaker dollar. Same-store sales rose 12.5% in the U.S., 2.1% in Europe, and 1.9% in the Asia-Pacific/Middle East/Africa regions. Year-ago sales were hurt by significant price discounting. We are lowering our 2003 earnings per share estimate by 1 cent, to $1.45, excluding one-time events, to reflect the company's cost guidance. Our 12-month target price remains $27, based on an industry-average p-e ratio of 16.5 times our 2004 earnings per share estimate of $1.66.

Intel (INTC): Reiterates 5 STARS (buy)

Analyst: Thomas Smith, CFA

The giant chipmaker reported fourth quarter earnings per share of 33 cents (including a 9-cent goodwill impairment charge and a 9-cent tax benefit), vs. 16 cents one year earlier and above our 30-cent estimate. Revenue rose 22% year-over-year and 12% sequentially. Gross margin improved to 56.7% in 2003 from 49.8% in 2002, and we model it at 62.6% for 2004. We believe the new 300mm wafer plants are boosting manufacturing efficiency. We are raising our earnings per share estimates to $1.30 from $1.20 for 2004, and to $1.70 from $1.60 for 2005. Applying the present p-e ratio of 26 to our 2005 estimate implies price potential to $44. Our 12-month target price is $45.

Apple Computer (AAPL): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Apple reported December-quarter operating earnings per share of 16 cents, vs. 3 cents one year earlier, beating our 14-cent estimate. Revenues rose 36% to $2.0 billion, above our $1.9 billion estimate on strong growth in laptops and iPods. However, gross margin was below our estimate, hurt by warranty costs. Apple sees March-quarter revenues at $1.8 billion, $100 million above our projection, and earnings per share of 8 cents to 10 cents, above our 7-cent estimate. We are raising our fiscal 2004 (ending September) earnings per share forecast by 4 cents, to 44 cents. At a price-to-sales ratio of 1.3, in line with the average of its industry peers, and with nearly $13 per share in cash and equivalents, we would hold Apple shares.

Genentech (DNA): Reiterates 3 STARS (hold)

Analyst: Frank DiLorenzo, CFA

Genentech reported fourth quarter pro forma earnings per share of 27 cents vs. 24 cents one year earlier, one penny above our estimate. Rituxan sales of $413 million, vs. $347 million, were $8 million above our view. Herceptin sales of $114 million ($107 million in the fourth quarter of 2002) were $6 million above our projection. We are raising our 2004 earnings per share estimate to $1.48 from $1.44 and our forecast for 2005 to $1.87 from $1.84. We consider Genentech fully priced based on a 2005 p-e-to-growth ratio of 2.0, compared to 1.2 for the company's peer group. We have modeled over $5 billion in peak annual Avastin sales by 2011 into our models and declining capital expenditures in 2005, leading to our 12-month target price of $99.

Medtronic (MDT): Reiterates 5 STARS (buy)

Analyst: Robert Gold

Medtronic has resubmitted a request with the FDA to begin its Endeavor III clinical trial evaluating its drug-coated coronary stent. Based on results in earlier trials, we believe there is a high probability that Medtronic will emerge as the third player in the U.S. drug-coated stent market, with sales commencing by early 2006. The company adds that it has completed patient enrollment in an Endeavor II trial outside of the U.S. We feel success in the drug-coated stent market is critical to Medtronic's ability to sustain 15%-plus earnings per share growth over the coming five years. We are keeping our 12-month target price at $57.


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