Markets & Finance

S&P Says Accumulate Southwest Air


Southwest Airlines (LUV): Reiterates 4 STARS (accumulate)

Analyst: James Corridore

Southwest 's March passenger traffic was up 15%, on a 5% increase in capacity. Southwest cited a strong response to recent fare sales, which S&P believes have been extremely aggressive. The company says it is seeing strong bookings into May in response to these fares. S&P thinks Southwest has the cost structure to make money at lower yields, but margins are likely to be under pressure. S&P is cutting the 2004 earnings per share estimate to 50 cents, from 60 cents, and is keeping the 2005 estimate at 75 cents. S&P has cut its target price by $2 to $18, valuing Southwest at 24 times the 2005 earnings per share estimate, above peers, but at the low end of the historical

price-earnings range.

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

Analyst: Erik Eisenstein

Fannie Mae shares are a bit weak this morning, following criticism of its accounting by the Center for Research and Analysis. Specifically, they imply that the government-sponsored mortgage financier is managing GAAP earnings by choosing to shorten its liabilities through derivative transactions, rather than debt extinguishments, which affect GAAP earnings immediately. S&P agrees that the opportunity for earnings management exists, but isn't convinced that this has been Fannie Mae's intent. S&P notes that Fannie Mae actually did repurchase $20 billion in debt in 2003, taking $2.3 billion in losses on the extinguishments, which is three times more than the debt extinguishment losses of 2002.

Quiksilver (ZQK): Maintains 5 STARS (buy)

Analyst: Marie Driscoll, CFA

S&P raised the target price for this speciality retailer to $27, which is based on a p-e of 21 times S&P's $1.27 calendar 2004 earnings per share estimate. S&P sees improving domestic employment supporting further gains in discretionary consumer spending and, with retail inventory levels lean, Quiksilver should again exceed expected top-line growth. This is indicated by 8% higher summer bookings. S&P sees a 15% rise in first-quarter sales, and a 10% rise in both third-quarter and fourth-quarter sales. S&P believes higher demand for men's apparel, further penetration of the women's apparel market, and long-term opportunities for international growth via its Asia/Pacific platform support its buy opinion on the shares.

Nokia (NOK): Reiterates 5 STARS (buy)

Analysts: Ari Bensinger, and Richard Stice, CFA

Nokia sees first-quarter net sales of 6.6 billion ($8.13 billion) and earnings per share of 17 euro cents, below the prior guidance. It cited a slowdown in mobile-phone sales in Asia and Europe, plus a less favorable business mix. S&P is trimming the 2004 earnings per share estimate by 2 cents, to $1.09. The news is a bit disappointing, but S&P is continuing its buy opinion on the shares, based on Nokia's dominant handset-market position and superior manufacturing scale. Nokia trades at a discount to peers on a p-e-to-growth basis and to S&P's intrinsic value calculation using

discounted cash-flow analysis. S&P's 12-month target price remains $26.

Black & Decker (BDK): Maintains 5 STARS (buy)

Analyst: Amrit Tewary

Black & Decker raised its first-quarter earnings per share guidance to 90 cents to 93 cents, up from the prior estimate of 67 cents to 70 cents. Citing strong demand in its North American business, the household appliances maker now expects to report sales growth of 16% for the quarter, or mid-single digit growth excluding currency translation and acquisitions. Based on higher sales growth expectations, S&P is raising the first-quarter earnings per share estimate to 92 cents, from 70 cents, and is upping the full-year 2004 estimate to $4.84, from $4.40. S&P's 12-month target price of $73, raised today from $66, is based on S&P's historical p-e model and assumes a target p-e of 15 times S&P's 2004 earnings per share estimate.

Tupperware (TUP): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Howard Choe

Tupperware raised the earnings per share guidance for the first quarter to a range of 21 to 24 cents, and upped the 2004 estimate to a range of $1.23 to $1.33, citing better operational performance, lower interest expense, and lower corporate costs. The maker of food-storage containers also continues to benefit from a favorable foreign-exchange impact. S&P is encouraged by growth in Tupperware's European sales force and in the cosmetics division, but believes the outlook for North America remains poor. S&P is raising the first-quarter earnings per share to 23 cents, from 15 cents, upping the 2004 estimate to $1.19, from $1.02, and increasing the 2005 estimate to $1.30, from $1.12. S&P also is boosting its 12-month target price to $20, from $13, based on the view that the company can carry a forward p-e of 15, in line with peers.


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