Markets & Finance

S&P Starts Google with Hold


Google (GOOG): Initiates with 3 STARS (hold)

Analyst: Scott Kessler

Google is a leader in keyword search, the largest category of online advertising. Mostly reflecting expected gains in its AdWords (Google-owned Web sites) and AdSense (third-party Web sites) advertising programs, we at S&P project revenue increases of 104% in 2004 and 66% in 2005. We're establishing earnings-per-share estimates of $1.24 for 2004 and $2.30 for 2005.

Based on intrinsic, relative, and option analyses, and accounting for notable risks that include competition, execution, and upcoming lock-up expirations, we're setting a 12-month stock-price target of $118. After Google's initial public offering earlier this month, shares currently trade around $106, and we expect them to be very volatile.

Eli Lilly (LLY): Upgrades to 5 STARS (buy) from 3 STARS (hold)

Analyst: Herman Saftlas

We view Lilly as one of the best-positioned firms in the U.S drug industry, based on its solid portfolio of patent-protected drugs and robust R&D pipeline. We expect Lilly to rank in big pharma's top tier for earnings growth over the coming years. Key new drugs include the Cymbalta antidepressant, the Altimta anticancer treatment, and Yentreve for urinary incontinence. We see Lilly prevailing against challenges to Zyprexa patents.

We see Lilly's shares as attractively valued at 19.7 times our $3.35 2005 earnings-per-share estimate, a modest premium to peers. Our target price is $76. Lilly offers a solid 2% dividend yield.

J.M. Smucker (SJM): Reiterates 3 STARS (hold)

Analyst: Richard Joy, Howard Choe

Excluding unusual items, the maker of peanut butter and jelly posted July-quarter EPS of 57 cents, vs. 54 cents, in line with estimates. Sales grew 22% on acquisitions and were flat organically. Growth in branded products such as Smuckers, Jif and Uncrustables was offset by declines in Crisco and non-branded industrial products. Operating margin slipped 50 basis points due to costs related to the Multifoods acquisition. Smuckers' outlook for fiscal 2005 (Apr.) earnings is in line with our $1.60 estimate. Given the company's brand strength, offset by the Multifoods integration risk, we view Smuckers as fairly valued.

Motorola (MOT): Reiterates 5 STARS (buy)

Analyst: Kenneth Leon, CPA

We view Wednesday's release by Motorola to develop third-generation handsets for Japan's NTT DoCoMo as a plus to gain market share in Japan. New handsets will use DoCoMo's FOMA technology, a form of W-CDMA for computing and high-speed Web capability. Motorola says the new handsets will be available in the first half of 2005. KDDI, the No. 2 wireless carrier in Japan, which users CDMA 1XEV-DO, is well ahead of DoCoMo in the move to 3G services. Qualcomm receives royalties on both CDMA technologies. With a positive handset outlook, we would buy Motorola shares.

DoubleClick (DCLK): Maintains 3 STARS (hold)

Analyst: Scott Kessler

DoubleClick shares should trade higher on Wednesday, following the Web marketing company's announcement that Microsoft's MSN has been certified to accept multiple formats of DART Motif rich-media ads. Although Motif has not contributed materially to DoubleClick revenues as of yet, this announcement underscores its potential. Rich media ads accounted for 8% of U.S. Internet advertising revenues in 2003, according to the PricewaterhouseCcoopers/IAB Internet Advertising Report, and S&P forecasts a rise to 12% in 2004 and 17% in 2005. Our EPS estimates and $7 12-month target price are unchanged.

Orbitz (ORBZ): Reiterates 1 STAR (sell)

Analyst: Scott Kessler

The travel Web site was up 5% Tuesday, following news that Northwest Airlines would charge new fees, starting Sep. 1, on tickets sold via all of its sales channels except certain Web sites, including Orbitz.com. Sabre Holdings indicated in a press release, and to S&P, that it thinks Northwest's decision violates the spirit of a relationship between the two companies. We believe Northwest's action could modestly benefit Orbitz, which was 13%-owned by Northwest as of March, 2004. Nonetheless, we think Orbitz will become increasingly marginalized by supply and competitive issues.

Conoco Phillips (COP): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Tina Vital

Conoco Phillips has been reshaping its upstream portfolio. We expect upstream volumes to decline 3% in 2004 and decline slightly in 2005, before large developments likely raise gains to 3% through 2008. Our revised oil and gas price forecast leads us to raise our 2004 EPS estimate by $1.38 to $10.17, and 2005's by 24 cents to $7.53. However, we expect U.S. refining margins will narrow from the second quarter. We're cutting our 12-month target price by $11 to $75.


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