Markets & Finance

S&P Says Accumulate Apollo Group


Apollo Group (APOL): Maintains 4 STARS (accumulate)

Analyst: Michael Jaffe

Apollo Group posts May-quarter EPS of 56 cents, vs. 39 cents a year ago, 1 penny above our estimate, on a 28% gain in students and a leveraging of teaching costs. The company says buying back its shares is now an excellent use of its $1.3 billion of cash and securities. We still see EPS of $1.85 in fiscal year 2004 (ending August) and $2.30 in fiscal year 2005. At 37 times our fiscal 2005 estimate, Apollo stock is at a premium to the S&P 500. But a p-e-to-growth rate of 1.5, based on 25% EPS gains we foresee, is a bit below the index. We think a premium is warranted by our view of Apollo as a fast-growing leader in for-profit education. Our target price remains $109.

Aztar (AZR): Downgrading to 1 STAR (sell) from 3 STARS (hold)

Analyst: Tom Graves, CFA

We think approval of slot machines is increasingly likely to occur in Pennsylvania. We expect this to lead to more competition for Aztar's Tropicana casino in Atlantic City. We see Tropicana, in the midst of an expansion, accounting for more than 50% of Aztar's operating profit in 2004 and 2005. Based on a p-e multiple of 12 times our 2005 EPS estimate, a significant discount to peers, we are lowering our target price to $22 from $28. We think Aztar's profit mix, and the prospect of more competition for Atlantic City, should cause the shares to trade at a p-e multiple well below that of other casino stocks.

AT&T (T): Downgrades to 3 STARS (hold) from 5 STARS (buy)

Analyst: Todd Rosenbluth

AT&T's operating environment appears worse than we had originally expected. With the effects of the telco competing on price for business customers, and the advanced rollout and marketing of VoIP services in major cities, we are reducing our operating EPS estimates for 2004 by 37 cents to 89 cents, and cutting our 2005 estimate by 32 cents to 81 cents. Using our relative p-e and enterprise value/EBITDA analysis, we are cutting our 12-month target price from $23, to $16. We see AT&T's roughly 6% dividend yield providing some downside support but, given EPS pressure we see, we would not add to positions.

IBM Corp. (IBM): Maintains 5 STARS (buy)

Analyst: Megan Graham-Hackett

IBM reported the dismissal of cases by about 50 former and current employees in which the employees claimed to have developed cancer due to hazardous conditions at the company's San Jose, Calif., disk-drive plant. The cases were dismissed by the state Superior Court in San Jose after a settlement between IBM and the plaintiffs was reached. While details of the settlement were not made available, we do not believe there is an impact to our discounted cash flow analysis which supports our $131 12-month target price on IBM shares.

Fisher Scientific (FSH): Maintains 4 STARS (accumulate)

Analyst: James Loo, CPA

Fisher reported that the Molecular BioProducts unit of pending merger partner Apogent may have improperly recognized $200,000 to $600,000 of revenue in the first quarter of 2004. Fisher and Apogent believe this is an isolated incident. But Fisher has postponed its shareholder vote on the pending merger, which we believe is prudent, to enable it to complete due diligence in this matter. Fisher now anticipates the transaction will close on Aug. 2, 2004. We view the amount is immaterial, representing less than 0.2% of Apogent's first-quarter sales and we do not think it should affect the transaction. Our target price is $69.

Amgen (AMGN): Maintains 5 STARS (buy)

Analyst: Frank DiLorenzo, CFA

Amgen submitted a Biologics License Application with the FDA for Palifermin to treat oral mucositis in patients with hematologic malignancies undergoing high-dose chemotherapy that is followed by a bone marrow transplant. The filing is slightly ahead of our third-quarter expectation, and we think Palifermin could garner six-month priority review from the FDA. Assuming approval, we forecast peak annual Palifermin sales of $750 million to $1 billion by 2011-12. We see shares undervalued with a p-e-to-growth ratio of 0.9, based on our 2005 EPS estimate of $2.85, compared to a 1.6 peer ratio. On our unchanged discounted cash flow model, our target price remains $75.

Nextel Communications (NXTL): Maintains 5 STARS (buy)

Analyst: Kenneth Leon, CPA

We believe regulatory uncertainty on Nextel's proposal for spectrum re-allocation may be leading to a favorable FCC decision. Reuters reported that FCC Chairman Powell agreed to Nextel's plan to move to 1.9 Ghz from 800 Mhz bands that remain for public safety usage. Nextel will put up about $3 billion in cash and spectrum for the exchange. While a final FCC decision is expected in July, we see Nextel's competitors filing court appeals. However, we believe Nextel shares may trade higher on FCC developments. Our 12-month target price is $38. Below peers at 10 times our 2005 EPS estimate, we would buy Nextel .

Micron Technology (MU): Maintains 3 STARS (hold)

Analysts: Thomas Smith, CFA; Richard Stice, CFA

Micron posted May-quarter EPS of 13 cents, vs. a loss of 36 cents, well above our 4 cents and the Street's 9 cents EPS estimates. Net sales rose 13% quarter-over-quarter on 15% higher average selling prices. Gross margin of 34.7% exceeded our 30.0% estimate. The company says memory demand in the computing industry has been stronger than normal during the first half of calendar 2004. Micron sees overall first-quarter 2005 (Aug.) capital expenditures below first-quarter 2004's expected $1.5 billion. We are raising our first-quarter 2004 EPS estimate by 9 cents, to 19 cents. Our 12-month target price of $16 combines discounted cash flow analysis with relative valuation metrics.


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