Markets & Finance

S&P Says Accumulate Time Warner


Time Warner (TWX): Maintain 4 STARS (accumulate)

Analyst: Tuna Amobi, CPA, CFA

Market speculation has resurfaced that America Online unit may be considered for sale or a spin-off, as Time Warner's 10-K substantiates its outlook for continued significant 2004 declines in the unit's U.S. narrowband subscribers. Time Warner had guided to what could prove an achievable low double-digits AOL EBITDA growth, and nearly $1 billion of free cash flow in 2004, mostly driven, we think, by cost cuts. But with questions on the sustainability of these cost containment initiatives, we think the board may increasingly mull an AOL sale. But we believe the ongoing Securities and Exchange Commission and Dept. of Justice probes could present near-term hurdles.

Nucor (NUE): Reiterate 5 STARS (buy)

Analysts: James Corridore, Leo Larkin

Nucor stock is up today after the company raised its first-quarter earnings per share guidance to 80 cents to $1.00 from its previous forecast of 40 cents to 60 cents, well above our 50 cents forecast. Nucor attributes this guidance to the success of its scrap surcharge in keeping up with scrap prices, as well as increased overall pricing and strengthening global and domestic demand for steel. We are putting our first-quarter and full year 2004 EPS estimates under review. We believe Nucor is attractively valued relative to the other base-metals companies we follow, based on p-e and free cash flow analyses.

Macromedia (MACR): Downgrading to 3 STARS (hold) from 5 STARS (buy)

Analyst: Scott Kessler

Shares of Macromedia are up some 12% year to date, materially outperforming the S&P 500. We believe much of the optimism as to both resurgent spending on technology and advertising, and Macromedia's new products, are largely priced into the stock. We are also trimming our fiscal year 2005 (March) EPS estimate by 3 cents, to 76 cents, reflecting a slightly less aggressive outlook for revenues. After revisiting peer comparisons and our DCF model, we are lowering our 12-month target price to $21 from $25. We believe risk-reward considerations warrant our taking a less positive view of the stock.

Chattem (CHTT): Upgrading to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Howard Choe

Excluding charges, Chattem posted 33 cents, vs. 23 cents a year ago, February-quarter EPS, 1 cent above our estimate. We see new product flow and gross margin expansion as the main drivers of growth in the near term. Given our view of Chattem's strong sales momentum, higher EPS outlook, high profit margins, easy comparisons, and attractive valuation, we see the shares significantly outperforming the S&P 500 over the next 12 months. We are raising our fiscal year 2004 (November) EPS estimate to $1.53 from $1.43, and our 12-month target price to $33 from $29. The shares currently trade at a 15 forward p-e, a 15% discount to peers.

Adobe Systems (ADBE): Reiterate 5 STARS (buy)

Analyst: Scott Kessler

Adobe posts February-quarter earnings per share of 50 cents, vs. 23 cents a year ago, well in excess of our and Street estimates. Revenues rose 43%, driven by sales of the new Adobe Creative Suite and Intelligent Documents offerings. Operating margin of 38.6% easily bested our forecast on higher revenues and a favorable sales mix. Reflecting what we think will be continuing sales momentum and improving operating leverage, we are raising our EPS projections for fiscal year 2004 (ending November) to $1.66, from $1.50, and for fiscal 2005 to $1.82, from $1.66. Based on revised relative and discounted cash flow (DCF) analyses, we're raising our 12-month target price by $1 to $46.

Nike (NKE): Maintain 4 STARS (accumulate)

Analyst: Yogeesh Wagle

Nike posts February-quarter EPS of 74 cents, vs. 47 cents a year ago, beating our estimate by a penny. Revenues rose 21% on favorable foreign exchange and double-digit growth in the Asia Pacific, Europe, and Americas regions. Key U.S. footwear revenues gained 1.0%. We think Nike is likely to maintain strong EPS growth momentum as it capitalizes on an improved relationship with Foot Locker (FL), attractive growth opportunities in an expanded Eurozone, as well as Asia Pacific markets, and the upcoming Summer Olympics. We are raising our 12-month target price to $89 from $84, or 22 times our $4.00 fiscal year 2005 EPS (May) estimate.

Qualcomm (QCOM): Reiterate 5 STARS (buy)

Analyst: Kenneth Leon, CPA

We think today's news may boost Qualcomm shares. The Hong Kong government wants to replace its older 2G licenses with CDMA2000, a 3G standard, to be installed when the operator licenses expire next year. In our opinion, the company is the major beneficiary of CDMA2000 deployments, as it receives revenue on licenses for equipment and CDMA2000 chipset shipments. We believe Qualcomm is protected on 3G patents for CDMA2000 and WCDMA systems, and the company is confident that TS-CDMA, another 3G standard being developed in China, will be licensed to it. Our 12-month target price is $80.


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