Markets & Finance

S&P Says Buy Intel


Intel (INTC): Reiterate 5 STARS (buy)

Analyst: Tom Smith, CFA

Intel settles remaining issues in a long-running patent infringement suit and will pay $225 million to Intergraph. It will pay $125 million in the first quarter and $25 million in each of the next four quarters. The accounting treatment is yet to be determined. We note that $225 million is only about 2.7% of our revenue estimate for the first quarter and would work out to about 3 cents per share in one-time costs. We are lowering our estimate for 2004 EPS to $1.27, from $1.30. Although we see payments as a negative, the possibility of payments has been well known and we view the end of this legal episode as a plus.

DeVry (DV): Reiterate 3 STARS (hold)

Analyst: Michael Jaffe

Soft demand for DeVry's undergraduate technology programs has limited its performance over the past couple of years. New undergrad enrollments rose modestly in the 2003 fall and summer semesters, but we do not see any major rebound through fiscal year 2005 (ending June). At 30 times our $1.00 fiscal 2005 EPS forecast, DeVry is in the lower half of its p-e range for the past decade. But we do not think our outlook warrants p-e expansion. However, after lowering our cost of capital assumption, we are raising our target price to $29 from $25, based on a blend of relative p-e and discounted cash flow (DCF) valuations.

California Pizza Kitchen (CPKI): Keep 3 STARS (hold)

Analyst: Dennis Milton

CPKI shares are up today as the company announces that first quarter same-store sales jumped 6.2% from a year ago, higher than its previous guidance of 2.0% to 3.0%. Revenues increased to $98.6 million, up 19% from a year ago, reflecting more stores in operation and sales trends. We are raising our 2004 EPS estimate by 3 cents, to $1.01, and our 12-month target price by $2, to $22, to reflect current sales conditions. At more than 20 times our 2004 EPS estimate, a slight premium to peers, we believe CPKI shares appropriately reflect long-term growth prospects we view as strong.

PepsiCo (PEP): Reiterate 5 STARS (buy)

Analyst: Howard Choe

PepsiCo sees first quarter EPS of 46 cents, 2 cents above our estimate. It expects first quarter sales to increase 10%, the second straight quarter of double-digit growth, driven by strength across all businesses. We look for the company to carry solid volume trends over the course of the year. The board approved a 44% dividend hike, to 92 cents, bringing the yield now to 1.7%, more in line with peers, and set a 3-year, $7 billion share buyback plan. Given our view of Pepsi's healthy growth prospects, strong cash flow and balance sheet, we see the shares as attractively valued at a p-e-to-growth ratio of 1.7, below peers.

GameStop (GME): Reiterate 4 STARS (accumulate)

Analyst: Amrit Tewary

On Monday, Microsoft (MSFT), one of GameStop's major suppliers of video game hardware, cut the price of its X-Box videogame console by $30, to $149.99. Also, Microsoft trimmed prices of select software titles. Looking ahead, we expect another of GameStop's suppliers, Sony (SNE), to cut prices for its PlayStation 2 videogame console on or before the May 2004 E3 trade show. We expect GameStop's fiscal year 2005 (ending January) sales to receive a large boost from hardware price cuts. Our $21 12-month target price is based on our historical p-e model.

Swift Transportation (SWFT): Initiate coverage with 3 STARS (hold) opinion

Analyst: Andrew West, CFA

We think Swift, the largest publicly-held truckload carrier in the U.S., will see 2004 revenues rise 8% on higher volumes and rates, but will struggle to improve operating margins on cost and regulatory pressures. We expect EPS to grow 13% in 2004, to $1.06 from 94 cents, but we see temporarily negative free cash flow on rising tractor purchases which we think will be required to renew an aging fleet. Assuming a compound annual 6-year EPS growth rate of 9%, slowing in perpetuity, and an 11% cost of equity, our mix of discounted cash flow (DCF) and relative value models indicates a 12-month target price of $18.


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