Markets & Finance

S&P Says Buy Microsoft


Microsoft (MSFT): Reiterates 5 STARS (buy)

Analyst: Jonathan Rudy, CFA

Microsoft agreed to settle class-action lawsuits with Massachusetts and North Dakota, following an agreement earlier in the week with Arizona, and will provide vouchers worth about a combined $148 million for the three states. Microsoft has now settled 12 state-specific class-action suits, and has five still outstanding. We believe that the terms of these settlements are fair, and we remain positive on the software maker's progress in settling its outstanding litigation. We continue to view Microsoft as attractive at a discount to our 12-month target price of $35 based on our discounted cash flow analysis.

AutoZone (AZO): Reiterates 4 STARS (accumulate)

Analyst: Yogeesh Wagle

Shares are down after AutoZone posted same-store sales for seven weeks of the August quarter down 1%, with retail same-store sales down 3%. We believe the retailer lags in merchandise selection and store renewal. While we view share buybacks as positive, we think AutoZone needs better marketing and merchandising to drive traffic and improve conversion. Still, with good growth drivers we see in the auto parts industry and AutoZone's industry-leading operating margins, we find the shares to be attractive, based on our projection of better fiscal 2005 (Aug.) sales. We are lowering our discounted cash flow-based target price to $100, from $105.

ImClone Systems (IMCL): Reiterates 5 STARS (buy)

Analyst: Frank DiLorenzo, CFA

As expected, European partner Merck KGaA received European Union approval for Erbitux in combination with irinotecan to treat irinotecan-refractory colorectal cancer patients. We estimate ImClone will receive a a mid-single digit royalty on these sales. We assume peak U.S. sales of Erbitux at $2.5 billion by 2012, with EU sales approaching $700 million. We assume Erbitux will get U.S. FDA approval to treat head and neck cancer by mid-2005. For 2004, we forecast U.S. Erbitux sales at $175 million. Based on our unchanged net present value analysis, our 12-month target price remains $99.

Caterpillar (CAT): Maintains 3 STARS (hold)

Analyst: Stewart Scharf

We see revenues benefiting from better market conditions, expansion in the Asia/Pacific region, and a pick-up in demand for heavy-duty trucks. However, we believe that shares are fairly valued, and we are reducing our 12-month target price to $87, from $88, about 16 times our 2004 EPS estimate of $5.38, close to the projected p-e for Caterpillar's peers. We see EPS growth of 16% in 2005, to $6.25. We view Caterpillar's earnings quality as average, since we estimate S&P Core EPS at $5.00 in 2004 and $5.88 in 2005, limited by stock option, pension, and other post-retirement expenses.

Research In Motion (RIMM): Maintains 3 STARS (hold)

Analyst: Kenneth Leon, CPA

RIMM posted EPS of 36 cents, vs. 23 cents, excluding special items, 3 cents better than our estimate and 4 cents above the Street's. Global demand and higher average pricing of BlackBerrys have boosted sales and profitability. Margins have widened with an improved product sales mix, and BlackBerry's backlog is running at two times the net new subscribers added. We are increasing our fiscal 2005 (Feb.) EPS estimate to $1.78, from $1.70, and keeping 2006's at $2.10. We are raising our 12-month target price to $67, from $63, based on shares trading at 10 times our 2005 sales estimate. With shares at a premium to peers, we would hold.

Electro Scientific (ESIO): Maintains 3 STARS (hold)

Analyst: Markos Kaminis

Electro Scientific posted May-quarter EPS of 54 cents, vs. a loss of 75 cents, far ahead of Street estimates and our 12 cents estimate. Revs soared 264%. Net orders in the fourth quarter rose 71% sequentially and sequential order growth exceeded 50% in all three of its businesses. Gross margin widened to 53%, from 40%, in the third quarter. Electro Scientific sees August-quarter revenues at $80 million to $90 million, our $60 million estimate. Following its strong fourth-quarter report, shares were up sharply after the market close on June 29. We're impressed with the degree of growth in both sales and orders, as Electro Scientific benefits from cyclical demand and its strong market presence. We are placing our estimates under review.

Commerce Bancorp (CBH): Maintains 5 STARS (buy)

Analyst: James O'Brien

The stock was down about 5% yesterday after Federal authorities indicted two officers of Commerce's Philadelphia bank subsidiary on fraud charges. Investors reacted swiftly in an era of heightened corporate governance scrutiny, but we view this as an isolated incident and not indicative of a systemic problem. However, a fast grower such as Commerce may need to review its internal controls. We think its unique business model remains intact, and we view this dip as an enhanced buying opportunity. Our 2004 and 2005 EPS estimates remain $3.21 and $3.96, respectively. Our target price stays $80.


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