Markets & Finance

S&P Says Accumulate Amgen


Amgen (AMGN): Maintains 4 STARS (accumulate)

Analyst: Frank DiLorenzo, CFA

Amgen agreed to acquire Tularik for about $1.3 billion, net of cash, and its 21% stake. From a valuation perspective, S&P is neutral on the deal, which is set for a second-half closing pending approvals, due to the early stage nature of Tularik's programs and S&P's view of limited commercial opportunity for its T67 for liver cancer. From a strategic view, S&P views the move positively as Amgen and Tularik have an ongoing cancer-discovery deal, and Tularik's programs fit well with Amgen's R&D engine. S&P's 2004 earnings per share estimate drops to $2.37, from $2.39, and 2005's estimate goes down to $2.81, from $2.84, on higher R&D spending. S&P's

discounted cash-flow-based target price is $75.

Aeropostale (ARO): Initiates with 4 STARS (accumulate)

Analyst: Marie Driscoll, CFA

By focusing on 11-to-20 year-old value customers, Aeropostale has seen solid sales, market share, and earnings per share gains since its May, 2002 IPO, while some major teen-apparel retailers have disappointed. S&P sees a 20% five-year earnings per share growth rate as Aeropostale doubles its store base and fine-tunes its merchandise to reflect prevailing fashions. The rebound in young men's apparel should support S&P's 6% comp-store sales estimates for fiscal 2005 (Jan.) and provide a catalyst for the shares. S&P's fiscal 2005 and 2006 earnings per share estimates are $1.80 and $2.23, respectively. S&P's $43 12-month target price is based on relative and discounted cash-flow valuations.

Hewlett-Packard : Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Megan Graham-Hackett

S&P's upgrade is largely based on valuation. S&P notes that it continues to monitor the technology company's exposure to stock-option and pension expenses as they relate to earnings quality. Still, S&P believes H-P could improve the consistency of its execution with the recent achievement of profitability in its server and PC businesses. This could cause the discount that H-P trades at on a price-sales basis, vs. peers, to narrow. S&P has raised the 12-month target price to $27, from $24, to reflect the lower interest-rate environment. This adjustment cut S&P's weighted average cost of capital estimate for H-P to 10.4%, from 11%.

Microsoft (MSFT): Maintains 5 STARS (buy)

Analyst: Jonathan Rudy, CFA

Microsoft announced that it will lower the price of its X-Box video-game console to $150, from $180, a move that had been widely expected. S&P sees this price cut being matched by Sony for its PlayStation 2 platform. S&P expects the new X-Box price point to generate more excitement around X-Box as the annual video-game industry trade show, E3, approaches in May. S&P expects that video-game software providers will also benefit from this next round of hardware-console price cuts. S&P's favorite name in this sub-industry remains Electronic Arts, which is ranked 4 STARS (accumulate).

Fannie Mae (FNM): Reiterates 3 STARS (hold), and Freddie Mac (FRE): Reiterates 2 STARS (avoid)

Analyst: Erik Eisenstein

The chair of the Senate Banking Committee released a draft bill on Fannie Mae and Freddie Mac's oversight, which would create a new regulatory agency with receivership powers. S&P sees the bill, if passed, as a Congressional move toward disassociation from Fannie Mae and Freddie Mac, reducing their implied subsidy. With Fannie Mae and Freddie Mac opposed to the bill, S&P views the bill as unlikely to pass in this election year, at least without compromise. Yet S&P also sees it as a hard-line position unfavorable to Fannie Mae and Freddie Mac, even at this stage. S&P is lowering the 12-month target prices on both companies by $1; Freddie Mac to $57 and Fannie Mae to $79.

DaimlerChrysler (DCX): Maintains 2 STARS (avoid)

Analyst: Efraim Levy, CFA

S&P is lowering the 12-month target price on auto maker DaimlerChrysler to $39, from $40. S&P's 32 euros target price is equivalent to $39 (based on recent euro-to-dollar exchange rates of one euro equaling $1.21.) S&P's valuation is based on a discounted cash-flow analysis and economic profit valuation of the core automotive business, with investments and the financial-services unit valued separately. Based on a peer comparative sum-of-the-parts valuation, the parts could be worth nearly $42. However, without a natural buyer, S&P believes the realizable value would be lower.


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