Markets & Finance

S&P Says Buy Medtronic


Medtronic (MDT): Maintains 5 STARS (buy)

Analyst: Robert Gold

The medical-device maker posted fourth-quarter operating earnings per share of 48 cents, vs. 40 cents, 2 cents above S&P's estimate. Sales rose 24% to $2.67 billion, ahead of our $2.5 billion estimate, driven by upside in the vascular, diabetes, and cardiac rhythm-management segments, and about a 5% boost from an extra selling week. We believe marketshare gains were generated across product lines. In our view, Metronic is poised for accelerating sales growth in fiscal 2005 (Apr.), but we are keeping our fiscal 2005 earnings per share estimate at $1.90 on an expected rise in selling, general, and administrative costs, as well as R&D ratios. We are initiating a fiscal 2006 estimate of $2.25. We keep our $58 target price.

Forest Oil (FST): Reiterates 2 STARS (avoid)

Analyst: Charles LaPorta

Yesterday, Forest agreed to acquire Wiser Oil for $330 million, or about $10.60 per share. Forest plans to finance the all-cash tender with a combination of debt, proceeds from a 4.5 million share equity issuance, and asset sales. As of March 31, the company had $25 million in cash and $200 million available under its credit facility. Although we see the transaction, subject to necessary approvals, helping to repair the damage from Forest's reserve write-off, we also see it hurting near-term liquidity, raising leverage and increasing risk.

SBC Communications (SBC): Maintains 2 STARS (avoid)

Analyst: Colin McArdle

SBC announced a tentative agreement with the Communication Workers of America, ending a four-day strike. The proposed new five-year contract provides a schedule for wage increases, outlines health-care benefits, and insures added job security for roughly 100,000 SBC employees. We think short-term issues are no longer problematic. However, we believe the settlement makes it likely that higher operating expenses will keep EBITDA margins below SBC's peer-group average. With additional competitive risks, we are maintaining our $20 12-month target price and would avoid SBC shares.

Novell (NOVL): Maintains 3 STARS (hold)

Analyst: Jonathan Rudy, CFA

April-quarter earnings per share of 3 cents, vs. a loss per share of 2 cents, excluding one-time items, is a penny below our estimate. Revenues of $294 million were better than our estimate. Novell cited strength in Linux and Identity Management product offerings. We are lowering our fiscal 2004 (Oct.) operating earnings per share estimate to 16 cents, from 18 cents, and we see 24 cents in fiscal 2005. With nearly $640 million in net cash and investments, or about $1.60 per share, and trading at a discount to peers at an enterprise value-to-sales multiple of 2.9, we would not add to positions based on our view of management's inconsistent execution.

VeriSign (VRSN): Maintains 4 STARS (accumulate)

Analyst: Scott Kessler

VeriSign announced the proposed acquisition of Germany's Jamba!, a provider of wireless content services in Europe, in a deal valued at $273 million in cash and stock. We expect the deal to close in the second quarter, pending approvals. We believe Jamba will broaden VeriSign's offerings, geographic footprint, and customer base. At what we estimate is two to three times Jamba's 2004 sales, we think the price is reasonable. Although the purchase will use 39% of VeriSign's cash and investments as of March 2004, we are comfortable with the price, as VeriSign has been generating notable cash, in our opinion. Our target price remains $21.

Boeing (BA): Maintains 5 STARS (buy)

Analyst: Robert Friedman, CPA

As expected, the aerospace giant announced that its financing subsidiary has entered into an agreement to sell its non-aircraft leasing assets to GE Capital for about $2 billion in cash, near the unit's net asset value. We are relieved that Boeing is exiting the non-aerospace financing business, as we believe these operations were outside of its circle of competence. We also applaud Boeing's decision to use partial proceeds to buy back its stock, as we calculate the shares are still trading at a modest discount to our discounted cash-flow based $50 per share 12-month target price.


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