IBM Corp. (IBM): Reiterates 5 STARS (buy); Sun Microsystems (SUNW) and Hewlett-Packard (HPQ): Maintains 3 STARS (hold)
Analyst: Megan Graham-Hackett
We're remaining neutral on the computer-hardware industry. Market researcher IDC says second-quarter 2004 global server sales rose 6.9%, led by volume servers (up 21%). While high-end server sales also grew (up 6.1%), the mid-range fell 11.7%. IBM remained No. 1 in terms of revenues with a 32.5% share, and was the only company among the top three to gain share. Hewlett-Packard followed with a 27.1% share (vs. 27.7% a year ago), and Sun Microsystems' unit shipments rose 33.8%, but revenue rose just 0.2%, and its share fell nearly 100 basis points to 12.5%. With few surprises in the report, in our view, there are no changes to our opinions.
The Sports Authority (TSA): Reiterates2 STARS (avoid)
Analyst: Mark Basham
The Sports Authority posted July-quarter pro forma earnings per share of 45 cents, vs. 50 cents, excluding integration costs, in line with our estimate. Same-store sales fell 3.8%, and the retailer sees a single-digit decline in the October quarter. However, with August retail sales appearing soft, we think there's risk for further sales and margin erosion. We question Sports Authority's strategy, as the integration of its merger with Gart Sports Company, store remodeling, and new store openings may be too ambitious. We also see risk of a rising balance sheet, with higher inventories and accumulating debt. Our fiscal 2006 (Jan.) earnings per share estimate falls to $1.55 from $1.85. Our 12-month target price is $17.
Chattem (CHTT): Reiterates5 STARS (buy)
Analyst: Howard Choe
Chattem released two items of good news today: higher earnings guidance, and a lower-than-expected settlement amount in a Dexatrim class action suit. Due to strong demand for its leading brands, Chattem now expects August-quarter earnings per share of 44 cents to 46 cents, up from 41 cents to 43 cents. Our August-quarter and 2004 earnings estimates remain unchanged at 46 cents per share and $1.67 per share. Chattem now expects the Dexatrim settlement amount to be $10 million to $15 million, down from $20 million to $25 million. We continue to be bullish on Chattem based on our view of its strong niche brands, high margins, and valuation at about 20% discount to our personal-care group.