Markets & Finance

S&P Cuts Teradyne to Hold


Teradyne (TER) and Lam Research (LRCX): Downgrades to 3 STARS (hold) from 5 STARS (buy); Amkor (AMKR), Applied Materials (AMAT) ASML (ASML), Axcelis (ACLS), Credence (CMOS), and Kulicke & Soffa (KLIC): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Richard Tortoriello

With Applied Materials' recent report of very strong January-quarter order growth and expected further strong growth in the April quarter, S&P expects a leveling-out of orders in the following two quarters. Thus, S&P cut its estimates and target prices on key chip-equipment makers.

S&P thinks a strong rise in industry shares over the past several months was bolstered by rising earnings estimates. An industry recovery is in its early stages, but S&P doesn't see further significant earnings estimate increases over the next two quarters. With the industy selling at 35 times S&P's calendar 2004 earnings per share estimates, vs. 18 times for the S&P 1500 index, S&P now views the shares as market performers.

S&P cut the 12-month target price for Teradyne to $29, from $35, and trimmed Lam Research's price to $29, from $40. The target price on Amkor was reduced to $17, from $22; Applied Materials was trimmed to $25, from $32; ASML was cut to $22, from $26; ACLS was trimmed to $13, from $15, Credence was shaved to $15, from $21, and Kuilicke & Soffa was reduced to $15, from $19.

Univision Communications (UVN): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

Spanish broadcaster Univision posted fourth-quarter earnings per share of 17 cents, on 37% more shares from the September, 2003 merger of Hispanic Broadcasting, vs. 14 cents -- in line with S&P's estimate. Proforma revenue (adjusted for Hispanic Broadcasting) rose 18%, and EBITDA rose 19%, well above its English broadcasting peers, as TV and radio kept strong ratings leads in core Hispanic demographics.

Univision guided to 8 cents to 9 cents first-quarter earnings per share on high single to low double-digit revenue and EBITDA growth. With the Hispanic Broadcasting integration evidently going smoothly, S&P is raising the 2004 earnings per share estimate by 6 cents, to 70 cents and is upping the 12-month target price by $2, to $40. S&P sees fair risk/reward at 2 times the p-e-to-growth, relative to peers.

Nextel Communications (NXTL): Maintains 5 STARS (buy)

Analyst: Kenneth Leon, CPA

S&P views Nextel as well positioned to gain market share in the business and government segments should Cingular Wireless and AT&T Wireless lose momentum if their merger proceeds as planned for a year-end closing. S&P forecasts Nextel to grow 2004 sales at 18% to 20%, with EBITDA service margins widening. S&P is raising the 2004 earnings per share estimate by 22 cents, to $2.10, which is a dime above company guidance, and is setting 2005's at $2.60. S&P's 12-month target price remains $38. Below the market and peers at 13.3 times S&P's 2004 earnings per share estimate, S&P would buy Nextel shares.

BEA Systems (BEAS): Maintains 5 STARS (buy)

Analyst: Jonathan Rudy

January-quarter operating earnings per share of 10 cents, vs. 9 cents, was in line with S&P's estimate but a penny better than the Street's estimate. The business software maker's revenue growth of 12% was better than S&P's estimate. BEA cited particular strength in the integration and portal product lines, in addition to strength in the telecom and financial-services industries. Profitability remained strong, with operating margin widening to 23.1%, vs. a year ago's 20.5%. S&P is raising the fiscal 2005 (Jan.) operating earnings per share estimate to 40 cents, from 37 cents. With BEA trading at a discount to peers on p-e-to-growth and enterprise value/sales metrics, S&P would buy shares at these levels.

Hewlett-Packard (HPQ): Maintains 3 STARS (hold)

Analyst: Megan Graham Hackett

Hewlett-Packard posted proforma January-quarter earnings per share of 35 cents, vs. 23 cents, in line with the preannouncement guidance. Revenues rose 9% to $19.5 billion, also in line, as personal systems segment grew 20%, led by notebooks. The enterprise segment grew 5% and was limited by Unix pricing pressure. Imaging and printing grew 6%. Gross margin at 25.4% was slightly below S&P's estimate and was offset by lower R&D spending. H-P sees April-quarter revenue of $19.2 billion to $19.6 billion, and earnings per share of 34 cents, both a bit above S&P's model, but H-P kept the full fiscal 2004 (Oct.) guidance at $1.43. Trading at a price-to-sales of 1, below peers' average, S&P views H-P as worth holding.

Nordstrom (JWN): Maintains 4 STARS (accumulate)

Analyst: Jason Asaeda

The department-store chain's January-quarter earnings per share of 74 cents, vs. 44 cents beat S&P's estimate by 7 cents. Gross margin widened by 350 basis points on reduced markdowns and shrinkage and improved sales leverage from a strong 8.5% same-store sales gain. Given S&P's view of favorable sales trends, the likelihood of further margin expansion from better inventory management and cost controls, and lower interest expense after a debt repayment, S&P is raising the fiscal 2005 (Jan.) earnings per share estimate by 8 cents, to $2.07. S&P is also raising the 12-month target price by $2, to $49, based on a belief that improved earnings will lead to p-e expansion.


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