Markets & Finance

S&P Says Buy Nokia


Nokia (NOK): Reiterates 5 STARS (buy)

Analyst: Ari Bensinger

S&P expects Nokia to enhance its mid-level handset portfolio by introducing new clamshell models and bigger and sharper color screens during the second half of 2004. In the interim, S&P thinks that near-term margins could be negatively impacted by an aggressive price-cut offensive aimed at helping Nokia maintain market share. S&P is lowering the 2004 earnings per share estimate to 97 cents, from $1.09, and trimming the 12-month target price to $23, from $26, due to the weaker outlook. Still, in the long term, S&P views the cell-phone maker, with its leading handset market position, as an attractive play on an improving wireless market.

Dell (DELL): Reiterates 4 STARS (accumulate)

Analyst: Megan Graham-Hackett

Dell preannounced upside to April-quarter revenue guidance. Dell now sees revenue $200 million above the original guidance, or $11.4 billion. This translates into revenue growth of 20%, vs. S&P's prior estimate of 18%. The PC maker cited strength in its international markets and across products, but emphasized the fastest growth in servers, storage, and services. Dell's earnings per share guidance remains 28 cents, in line with S&P's estimate. There's no change to S&P's model yet, but S&P expects further details at Dell's analyst meeting today. S&P views the shares as attractively valued based on S&P's

discounted cash-flow analysis, which yields the 12-month target price of $39.

Applied Materials (AMAT): Maintains 5 STARS (buy)

Analyst: Colin McArdle

More positive comments from both United Microelectronics and Taiwan Semiconductors reinforces S&P's belief that demand for semiconductors worldwide is vibrant. Rising unit sales and higher pricing suggests a healthy upturn in the chip cycle, which should last through 2005. In addition, S&P thinks equipment manufacturers are well positioned to grow as high capacity utilization at the chipmakers suggests the need for more capital spending. Applying a 35

price-earnings multiple to S&P's calendar 2004 earnings per share of 86 cents, S&P derives a 12-month target price of $30.

Electronic Arts (ERTS): Maintains 4 STARS (accumulate)

Analyst: Jonathan Rudy, CFA

The shares are down today on the news that president and COO John Riccitiello has resigned to join a private equity fund. CEO Larry Probst will assume his duties until a replacement is found. S&P is disappointed by the news, but believes Electronic Arts has a deep management team and should be able to find a highly qualified replacement. S&P also thinks the video-game software maker's excellent library of brands will continue to produce strong results. With nearly $2 billion in cash and short-term investments and no debt, S&P thinks the shares, which trade at a discount to peers on a p-e-to-growth basis, are attractive.

Genentech (DNA): Maintains 3 STARS (hold)

Analyst: Frank DiLorenzo, CFA

Initial first-quarter sales of cancer drug Avastin look solid at $38.1 million ($13.9 million due to inventory stock), which was $7 million above S&P's estimate. Rituxan sales of $400.6 million were $24 million below S&P's estimate. Herceptin sales were in line. Xolair sales were $1 million above S&P's estimate, and Raptiva sales were $2 million below S&P's forecast. S&P is raising the 2004 Avastin sales estimate to $301 million from $262 million, and upping the Xolair sales estimate to $170 million, from $156 million. S&P also is increasing the company's 2004 earnings per share estimate to $1.52, from $1.48, and upping the 2005 estimate to $1.93, from $1.91. With a p-e-to-growth ratio of 2.2 times S&P's 2005 estimate, vs. 1.1 for peer Amgen, and with a target price of $120 based on a discounted cash-flow model, S&P would hold the shares.

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

Analyst: Erik Eisenstein

Fannie and Freddie's safety and soundness regulator, the Office of Federal Housing Enterprise Oversight, proposed corporate governance standards, partially in response to its special examination of Freddie Mac. S&P likes what it sees of the proposals, especially pertaining to a separation of the CEO and chairman positions, term limits on directors, and auditor rotation. However, with OFHEO's status still in doubt as it awaits responses to the proposal, S&P's view of corporate governance at the two government-backed mortgage financiers, as well as the overall political climate, is unchanged. S&P's 12-month target prices are $79 for Fannie Mae and $57 for Freddie Mac.

R.F. Micro Devices (RFMD): Maintains 4 STARS (accumulate)

Analyst: Stephanie Crane, Richard Tortoriello

Cell-phone chipmaker R.F. Micro issued a press release confirming its March-quarter revenue guidance, which is consistent with comments that S&P noted Thursday from a Reuters report. The company sees March-quarter sales at the high end of the previous $152 million to $163 million range. It also sees strong customer demand and expects a sequential increase in June-quarter revenue. S&P believe this, and a positive report from Taiwan foundry United Microelectronics this morning, confirm comments from Nokia that its recent revenue disappointment was company-specific and that wireless industry sales remain healthy. S&P's 12-month target price is $14.


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