Markets & Finance

S&P Downgrades eBay to Accumulate


eBay (EBAY): Downgrading to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Scott Kessler

EBay shares have risen more than 30% since the company reported second-quarter results in late July. We believe eBay's fundamentals are in good shape, reflecting domestic and international growth in the eBay and PayPal platforms. We are modestly increasing our discounted cash flow (DCF)-based 12-month target price to $106 from $102, reflecting our slightly more optimistic outlook for free-cash-flow growth in some of the later years of our 15-year model. However, because eBay shares have appreciated to within 11% of our new target price, we are taking a somewhat less aggressive stance on the stock.

Swift Transportation (SWFT): Downgrading to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Andrew West, CFA

Swift Transportation warns it expects third-quarter earnings per share of 26 cents to 31 cents, below the 40 cents we had forecast, on higher fuel costs and failure to secure higher rates. Swift also plans to purchase and divest certain assets, and buy back up to $150 million of stock in the coming months. We consider Swift's failure to hike rates a concern, and are cutting our EPS estimate for 2004 to $1.09 from $1.31, and 2005's to $1.30 from $1.40. Our 12-month target price falls to $19 from $23, blending our DCF model (assuming 12% cost of capital and 3.5% terminal growth) and our relative value model (targeting 0.7X forward price/sales).

Nortel Networks (NT): Reiterate 3 STARS (hold)

Analyst: Kenneth Leon, CPA

Nortel expects third-quarter revenue to be lower than the second quarter, and full 2004 revenue growth to be mid-single digits, with the overall communications market growing faster than the company's top line. Despite strength in mobile communications, we believe Nortel is seeing weakness in its wireline business tied to service providers that are delaying or spending less in upgrading their networks from circuit to packet technology. We also see Nortel's downsizing presence in optical equipment having a negative impact in the second half. Priced below peers at 1.5 times our 2005 sales estimate, we would hold Nortel.

Cadence Design Systems (CDN): Downgrading to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Colin McArdle

Based upon our belief that semiconductor suppliers are reluctant to spend incrementally on electronic design automation (EDA) software due to uncertain demand for chips and rising inventories, we are lowering our outlook for the EDA peer group. We believe this reluctance to spend increases the risk of a revenue slowdown for the group for the remainder of the year. As we look at the risk/reward profile, we find it prudent to lower our 12-month target price for Cadence shares to $14 from $20, based on a 20% peer-group premium price-to-sales multiple on our 2005 revenues.


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