Markets & Finance

S&P Keeps Buy on ExxonMobil


ExxonMobil (XOM): Reiterates 5 STARS (buy)

Analyst: Tina Vital

ExxonMobil posted third-quarter earnings per share of 96 cents, excluding a 9-cent special charge, vs. 55 cents one year earlier. Results were 11 cents above our view, on better-than-expected refining and chemical results, reflecting the company's ability to process lower-quality heavy/sour crude feedstocks. Exploration & production earnings rose 45%, but missed our target due to Gulf of Mexico volume losses from Hurricane Ivan, and higher exploration expenses. ExxonMobil sees 2005 capital expenditures near the $15 billion to $16 billion levels of 2004. We are raising our 2004 earnings per share estimate by 21 cents to $3.64, and 2005's by 50 cents to $3.80. Our target price is $57, on a blend of

discounted cash-flow and peer-company multiples.

Verizon (VZ): Reiterates 5 STARS (buy)

Analyst: Todd Rosenbluth

Before one-time items, Verizon posted third-quarter operating earnings per share of 64 cents, flat with the year-earlier figure and 2 cents ahead of our estimate, aided by lower interest expenses. Revenue strength came from wireless operations and DSL customer additions, although wireline access line erosion continues at a pace similar to that at peers. We believe Verizon's nearly 1.7 million net wireless additions helped it to take additional market share from peers. We are also encouraged by improvements in wireless churn and revenue per user. EBITDA margin widened, though less than we expected.

DaimlerChrysler (DCX): Reiterates 3 STARS (hold)

Analyst: Efraim Levy, CFA, Yannick Mathieu

DaimlerChrysler posted third-quarter earnings per share of 0.94 euros (about $1.17), vs. an adjusted 0.31 euros, is above our 92 cents estimate and Street's 68 cents. We still see 2004 and 2005 earnings per share at $3.40 and $4.70. The Chrysler unit should continue its improving performance, but the Mercedes brand gives us concern. Based on recent euro/dollar exchange rates, our 35.4 euro target is equivalent to about $44. Our valuation is based on a discounted-cash-flow analysis and economic profit valuation of the core automotive business with investments and the financial services unit valued separately. Current dividend yield is at 4.3%.

Aetna (AET): Maintains 3 STARS (hold)

Analyst: Philip Seligman

Aetna posted third-quarter operating earnings per share of $1.75, vs. $1.28, 3 cents above our estimate. We are encouraged by the health care segment's 4.4% member gains, 13.9% higher premium and fee revenue, and cost controls yielding a 44% group operating income rise. We see strong free cash flow and a $740 million tax refund enabling more buybacks and acquisitions. But, given our view of risks such as expansion of New York and Connecticut probes and high HMO profits causing their accounts to balk at high premium rates, we would not add to the positions. We are raising our target price by $19 to $105, or p-e of 12.5 times our 2005 estimate of $8.40, modestly above peers.

Honda Motor (HMC): Maintains 2 STARS (avoid)

Analyst: Christopher Lee

On Oct. 27, Honda posted second-quarter earnings per American Depositary Share of 61 cents vs. 65 cents, beating our forecast by 6 cents. Honda benefited from a stronger-than-expected U.S. dollar, and robust performance of its motorcycle unit. We expect a strong Japanese yen and increasing competitive pressure in the US to affect earnings more significantly in the second half of fiscal 2005 (Mar.). We are raising our fiscal 2005 earnings-per-share estimate to $2.00 from $1.97. Based on a 10% discount to the median price-to-book value multiple for the past three years, we are increasing our 12-month target price to $23 from $21.

MetLife (MET): Maintains 3 STARS (hold)

Analyst: Gregory Simcik, CFA

MetLife reported third-quarter operating earnings per share of 82 cents, vs. 81 cents, a penny ahead of our estimate. Results include a 1-cent gain from revised 2003 taxes. Institutional business results were below forecast but were offset by better-than-expected individual results. Results for corporate and other also came in better. We believe individual results may be helped somewhat by revised accounting practices. We are raising our 2004 operating earnings-per-share estimate to $3.45 from $3.27, including a 14-cent benefit from the recent IRS audit. We are keeping our 12-month target price of $43, about 12 times our 2005 earnings per share estimate of $3.65.

Viacom (Class B) (VIA.B): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

Viacom posted third-quarter continuing earnings per share of 40 cents, before a 2-cent tax credit, vs. 37 cents, 3 cents shy of our estimate. Cable Networks and TV businesses again were key, and Outdoor was modest positive surprise. But Infinity Radio sharply lagged projections and the industry, likely raising more questions about its future. With the Blockbuster spin-off done, Viacom set an aggressive $8 billion stock buyback program, replacing the current $3 billion mandate. We think buyback execution could provide some catalyst to the shares. Viacom updated its 2004 pro-forma growth outlook to 8% for revenues and 16% for earnings per share.

Delta Air Lines (DAL): Reiterates 2 STARS (avoid)

Analyst: Jim Corridore

We expect Delta to open up sharply after news that a tentative agreement has been reached between the company and its pilots union on concessions. The deal reportedly includes a 32.5% wage cut, with total cost reductions in the $1 billion range that Delta was seeking. This, along with recent debt deferments and new financing, may buy the company some time. However, we think Delta will continue to burn cash, and we still see a strong possibility it will be forced into bankruptcy. We would take advantage of the expected surge in share price to reduce positions.

United Parcel Service (UPS):

Analyst: Jim Corridore

UPS announced 2005 rate increases on Oct. 28, which are in line with what we were expecting. Rates on UPS Ground, Next Day Air, 2nd Day Air, 3-Day Select and International services will rise 2.9%, in line with the 2.5% to 3% range we were targeting. In addition, UPS will add a 2% fuel surcharge on ground delivery, and will place a cap on the fuel surcharge on express at 9.5%. We think the market will absorb these increases, and expect them to be matched shortly by FedEx (FDX). We are keeping our 12-month target price at $96, valuing the stock at 28 times our 2005 earnings per share estimate of $3.40.


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