Markets & Finance

S&P Says Hold Sun Microsystems


Sun Microsystems (SUNW): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Sun preannounced March-quarter results, a restructure, plus a patent settlement and 10-year technology deal with Microsoft. It sees revenue of $2.65 billion, and a loss per share of 6 cents to 8 cents before charges, vs. S&P's estimated $2.9 billion in revenue and a 2 cents loss per share. Sun set a headcount cut of 3,000, or 9%, and will close facilities. It is expected to cut R&D and selling, general, and administrative spending by $500 million in fiscal 2005 (June). The Microsoft pact was the only surprise, and S&P thinks it reflects a more customer-responsive Sun. S&P is widening the fiscal 2004 loss per share estimate by 8 cents, to 22 cents. But with shares trading in line with peers at a price-sales ratio of 1.4, and with $5.5 billion in cash and short-term investments, S&P sees Sun as worth holding.

Gateway (GTW): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Gateway announced it plans to close down its network of 188 company-owned retail stores by Apr. 9. While Gateway's retail stores offered the company a unique sales channel, S&P believes the associated costs made it difficult for the PC maker to be profitable in the highly competitive PC market. In addition, with the acquisition of eMachines, S&P thinks Gateway has the ability to capitalize on new distribution channels. Gateway offered few details, and it's saving the discussion for its first-quarter 2004 earnings per share conference call on Apr. 29. With shares trading well below peers at a price-sales ratio of 0.5, S&P believes Gateway is worth holding.

Boeing (BA): Reiterates 3 STARS (hold)

Analyst: Robert Friedman

With the announcement from the General Accounting Office that it has doubts about the efficacy and cost structure of Boeing's $22 billion Future Combat Systems program, S&P believes the program is vulnerable to large cutbacks. The GAO's assessment underscores S&P's belief that military contracts are always vulnerable to cutbacks, or even outright cancellation. However, S&P has already discounted its view of the industry's mediocre economics in its free cash-flow models. Though Boeing trades at a discount to S&P's $50 discounted cash-flow-based target price, S&P believes the stock price still warrants a hold opinion on the shares.

Walgreen (WAG): Maintains 5 STARS (buy)

Analyst: Joseph Agnese

Walgreen reported a March sales increas of 17.4% on a 12.6% rise at comparable stores, both above S&P's expectations. Pharmacy comp-store sales grew 16.5% on an 8.1% increase in total prescriptions filled, both well above February and year-ago levels. Non-pharmacy sales were up 5.9% as sequential improvement continues. Walgreen is well positioned to benefit from the aging U.S. population, in S&P's opinion, with its focus on store expansion and improving customer service. S&P is maintaining the May-quarter earnings per share estimate at 33 cents, and is keeping the 12-month target price of $43, which is based on discounted cash-flow and p-e analyses.

Accenture (ACN): Initiates with3 STARS (hold)

Analyst: Stephanie Crane

S&P projects an early recovery for information-technology outsourcing solutions, which should allow Accenture to benefit from value-added outsourcing and consulting in key vertical markets. S&P sees revenues in fiscal 2004 (Aug.) and fiscal 2005 rising in the double digits amid an improving capital spending environment, coupled with the company's restructuring steps. S&P estimates earnings per share of $1.14 in fiscal 2004, and $1.32 in fiscal 2005, vs. $1.05 in fiscal 2003. S&P's hold opinion is based primarily on valuation. The target price is $25, and is based on a blend of peer-based and historical multiples, including p-e and price-to-sales ratios.

Microsoft (MSFT): Maintains 5 STARS (buy)

Analyst: Jonathan Rudy, CFA

Microsoft and Sun Microsystems reached settlement on Sun's lawsuit against Microsoft, under which Microsoft will pay $700 million to Sun to resolve pending antitrust issues, and $900 million to resolve patent issues. The companies have also agreed to pay royalties for the use of each other's technology. S&P sees this as a notable step for Microsoft towards resolving its remaining litigation. S&P believes the path has been cleared for Microsoft to utilize its $52 billion in cash and short-term investments in order to benefit shareholders. S&P would buy Microsoft. Shares trade at a discount to S&P's discounted cash-flow-derived target price of $35.


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