Markets & Finance

S&P Says Hold MGM


Metro-Goldwyn-Mayer (MGM): Maintains 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

An investor group led by Sony reportedly raised its all-cash bid for MGM to nearly $5B (about $12 a share, with $2 billion of debt) from $4.7 billion ($11.25 per share). This new offer, with a reported $150 million nonrefundable deposit, seems to us to be aimed against the $4.5 billion to $4.6 billion rival bid from Time Warner. This twist could escalate a bidding war, and a deal with either suitor could be close. Time Warner's CFO last week understandably demurred on an auction, but we think interest remains strong, although it's not entirely certain that Time Warner would sweeten its offer yet again.

US Airways (UAIR): Dropping coverage

Analyst: James Corridore

US Air filed for Chapter 11 protection yesterday, for the second time in two years. The company was unable to get another round of concessions from its workers and was facing violation of cash balance and other financial covenants. We are dropping coverage. We previously had a hold recommendation on the shares.

General Electric (GE): Maintains 3 STARS (hold)

Analyst: Robert Friedman, CPA

With $3 billion of aircraft leases, loans, securities, and commitments to again-bankrupt U.S. Airways, GE's Commercial Aircraft Services (GECAS) unit is by far US Air's largest creditor. However, in our opinion GE is well protected, as we believe GECAS's $3 billion exposure is primarily secured by most of the bankrupt airline's operating assets, which we surmise GE has conservatively valued. Also, with GECAS generating about 2.5% of GE's total EBIT, the unit is not one of its largest. Our discounted cash flow-based 12-month target price values GE at $32.

Mesa Air (MESA): Maintains 1 STAR (sell)

Analyst: James Corridore

We are reiterating our sell recommendation on Mesa after the news that US Airways, which accounts for about one-third of the company's revenues, filed for Chapter 11 bankruptcy protection yesterday. In our view, Mesa's share price does not adequately discount the possibility that US Air may be forced to liquidate. If this happens, we believe Mesa would be forced to either start flying as an independent carrier, which could anger its other partners, or try to get another major connection carrier partner, which we think would be difficult. Our 12-month target price is $4.

Merrill Lynch (MER): Maintains 4 STARS (accumulate)

Analyst: Robert Hansen, CFA

At a conference today, Merrill highlighted its flat organizational structure, prudent risk management, and its focus on profitable market share growth within its Global Markets and Investment Banking segments. We expect strong growth in commodities trading, leveraged finance, and principal investments in 2005. We maintain our EPS estimates at $4.40 for 2004 and $4.62 for 2005. Our 12-month target price stays at $60, which is 13 times our 2005 EPS estimate, a discount to peers. Trading at almost 12 times our 2005 estimate, we would accumulate the shares given our view of the stock's attractive valuation.


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