Markets & Finance

S&P Says Hold Fannie Mae


Fannie Mae (FNM): Reiterates 3 STARS (hold)

Analyst: Erik Eisenstein

Fannie Mae posted its February monthly summary. S&P saw no major surprises in the data, although the overall results were a bit better than S&P's forecast. While the mortgage portfolio shrank for the fifth straight month, the rate of contraction was a bit less than S&P had expected. The securitization business continued to perform well. On the results and continued strength in the overall home lending market, S&P is increasing the 2004 operating earnings per share estimate by 6 cents, to $8.07. S&P is raising the 12-month target price by $1, to $80.

Cendant (CD): Maintains 4 STARS (accumulate)

Analyst: Thomas Graves, CFA

S&P doesn't view Cendant's prospective IPO of its 100% equity in the Jackson Hewitt tax-preparation business as a major surprise. S&P think proceeds would likely be used for debt paydown, a stock buyback, and smaller acquisitions. S&P estimates that the IPO would be modestly dilutive to 2004 earnings per share. Based on Cendant's projected free-cash flow and earnings per share growth prospects, S&P look for a narrowing of the high-beta stock's discount to the S&P 500, which is now at about 18%, based on 2004 earnings per share estimates. S&P's 12-month target price remains $26, and the indicated dividend yield is 1.2%.

Seagate Technology (STX): Initiates coverage with 3 STARS (hold)

Analyst: Richard Stice, CFA

This disk-drive maker has experienced robust shipment growth in the personal-storage market and is also benefiting from its recent expansion into the mobile-storage sector. However, S&P notes that Seagate is heading into a seasonally weaker demand period and is also confronting excess inventory levels within the disk-drive industry, which are above the optimal range of four to six weeks. S&P's 12-month target price of $17 combines a discounted cash-flow analysis with a relative p-e valuation. As a result, S&P wouldn't add to existing positions at this time.

ImClone Systems (IMCL): Maintains 5 STARS (buy)

Analyst: Frank DiLorenzo, CFA

During Monday's call, ImClone gave limited information on the launch of its recently approved cancer drug, Erbitux. S&P expects more clarity after the first quarter and after ImClone publishes its 10-Q. The company sees up to three new antibodies in clinical trials by 2005. Due to a product that's already in inventory that should cover sales, S&P doesn't expect any costs of goods sold through 2005. On a favorable cost structure and milestone revisions, S&P is raising the 2004 estimate to earnings per share of 37 cents, from a 4 cents loss, and is raising the 2005 estimate to 80 cents , from 50 cents . S&P's net present-value analysis, based on peak U.S. sales of Erbitux of $1.5 billion by 2012, is unchanged. The target price is $57.

Delta Air Lines (DAL): Maintains 3 STARS (hold)

Analyst: Bryon Korutz, James Corridore

The stock is down Monday after news that Delta expects a $400 million first-quarter loss, which is $50 million more than it had expected, due mainly to higher fuel costs. S&P is placing the 2004 earnings per share estimate under review. The company has cut headcount, eliminated base commissions on domestic travel, and cut other costs, but it has been unable to reduce labor costs, unlike many mainline competitors. Given S&P's belief that Delta is not at risk of bankruptcy over the coming year, S&P would hold the shares.

Intersil (ISIL): Maintains 3 STARS (hold)

Analyst: Richard Tortoriello

Intersil agreed to acquire Xicor, a maker of high-performance standard analog chips, for about $529 million, subject to necessary approvals. Terms are $8.00 in cash and 0.335 shares of Intersil for each share of Xicor, with closing expected by the end of the second quarter. The acquisition would expand Intersil's portfolio in the computing power-management and flat-panel display markets. The company expects the planned deal to be neutral to earnings per share in 2004, and accretive in 2005. If consummated under current terms, S&P views the deal as long-term positive. But, given near-term integration risk, S&P would hold the shares.


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