Markets & Finance

S&P Ups Winnebago to Buy


Winnebago (WGO): Upgrades to 5 STARS (buy) from 3 STARS (hold)

Analyst: Efraim Levy, CFA

Winnebago reported May-quarter earnings per share of 51 cents, vs. 25 cents one year earlier. If lawsuit settlement charges are excluded, earnings per share would have been 64 cents, above our 49-cent estimate. Revenues were in line with our forecast, but margins were above, mostly on a better sales mix. With a 72% surge in order backlog, we are increasing our August-quarter sales estimate. We are raising our fiscal 2004 (ending August) earnings per share estimate to $2.05 from $1.90. For fiscal 2005, we look for earnings per share of $2.40. Based on a combination of historical p-e ratios and our

discounted cash-flow model, we are raising our 12-month target price to $45 from $31.

Viacom (VIA.B): Maintains 3 STARS (hold)

Analyst: Tuna Amobi, CFA

The company filed a Form S-4 on the pending split-off of 81.5%-owned Blockbuster (BBI). An exchange ratio will be set at time the divestiture transaction begins, and completion is expected in the third quarter. Prior to the split-off, Blockbuster proposes a $5 per share special distribution, to be partly funded with a new $1.45 billin credit facility. While Blockbuster has been a strong free cash generator, we see the divestiture as a de facto buyback of Viacom's "B" stock as the company moves to sever a slow-growth business with little strategic fit. We think the swap ratio, when set, could lead to oversubscription by Viacom holders.

Instinet Group (INGP): Maintains 3 STARS (hold)

Analyst: Robert Hansen, CFA

The largest electronic broker in Nasdaq securities reported May volume of Nasdaq-listed equities at 426 million shares, down 12% from April. We expect an increase by Instinet in broker-dealer rebates in 2004 and 2005 in order to attract trading volumes, partly offset by expense reductions, notably in compensation. We are lowering our 2004 EPS estimate to 18 cents from 22 cents, and 2005's to 22 cents from 30 cents. We are lowering our 12-month target price to $5, from $7, now 23 times our 2005 EPS estimate. We would not add to positions, given our view of increasing price competition.

Career Education (CECO): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Massimo Santicchia

The amended class action complaint against Career Education contains detailed descriptions of allegations, from 12 former employees, of student record falsification and improper accounting practices. Although it is difficult to judge the merit of such allegations, we think that the risk that there was systemic fraud has increased. We are lowering our target price to $60 from $80, incorporating a higher risk premium into our discounted cash flow analysis. Despite positive industry trends, we would not add to positions due to our view of the increased risk brought on by the allegations.

Adobe Systems (ADBE): Reiterates 4 STARS (accumulate)

Analyst: Scott Kessler

Adobe posted May-quarter earnings per share of 44 cents, vs. 27 cents, 2 cents higher than our estimate. Revenues rose 28% on continued strength in the company's Creative Suite and Acrobat products. Earnings per share and revenues came in at the high end of Adobe's guidance. The company said its most recent fiscal 2004 (ending November) outlook for revenues of $1.5 billion and earnings per share of $1.40 to 1.46 is too low, and we are keeping our Street-high projections of $1.6 billion and $1.72. We are raising our fiscal 2005 earnings per share estimate to $1.93 from $1.84, reflecting the anticipated debut of Acrobat 7. Our 12-month target price stays at $50, based on discounted cash-flow and peer analyses.


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