Markets & Finance

S&P: Still Accumulate Time Warner


Time Warner (TWX): Reiterates 4 STARS (accumulate)

Analyst: Tuna Amobi, CPA, CFA

Before 5 cents of net one-time charges, Time Warner posted third-quarter earnings per share of 15 cents vs. 11 cents, one cent cent above S&P and Street estimates. Revenues and adjusted EBITDA grew 5% and 9%, as expected. Time Warner affirmed its 2004 EBITDA growth target of low double-digits to low-teens. But AOL U.S. narrowband customer attrition continued at a slightly higher pace than we expected. More troubling to us, however, is the planned restatement of historical financial statements (2000, 2001 and possibly, 2002) arising from the AOL Europe consolidation, as Time Warner establishes a $500 million legal reserve for a pending government probe.

Ford Motor (F): Reiterates 3 STARS (hold)

Analyst: Efraim Levy, CFA

October sales volumes of Ford vehicles fell 5%, year-to-year. Cars declined 20%, but trucks rose 2.5%. Sales volume for the important F-Series rose 16%, but we are disappointed by the weakness in most of the company's premium brands. We expect incentive activity to continue in the very competitive U.S. automobile market. Ford's sedan sales should benefit from the recent introduction of two new mid-sized cars as well as the new Ford Mustang and Escape hybrid vehicle. Based on peer and historical p-e analyses, we have a 12-month target price of $14 for this cyclical company.

General Motors (GM): Reiterates 3 STARS (hold)

Analyst: Efraim Levy, CFA

GM's October total vehicle sales volume declined 4.7% year-to-year. Light truck sales declined 4.6%, while cars dropped 5.3%. Sales for the month are disappointing and we believe GM lost market share. Ford sales were down 5%, but sales for Chrysler Group of DaimlerChrysler rose 2%. We are concerned about GM's inventories and incentive levels in the U.S. We think further production cuts in January could follow GM's reduction in fourth-quarter U.S. production. Based on peer comparative and historical p-e analyses, our 12-month target price remains $41.

Prudential Financial (PRU): Maintains 3 STARS (hold)

Analyst: Gregory Simcik, CFA

Prudential posted third-quarter adjusted operating earnings per share of 92 cents, vs. 68 cents, 8 cents ahead of our estimate. Results benefited by 4 cents from favorable mortality and 3 cents from a tax true-up. Prudential has received requests for information in probes of insurance broker practices. We believe high 2004 transition costs will decline in 2005 and that stock buybacks will continue into 2005. However, reduced pension income and share dilution from convertibles over the next 3 to 6 months is a concern. We are raising our 2004 adjusted operating earnings per share estimate to $3.43 from $3.28. Our 12-month target price remains $51.

Halliburton (HAL): Reiterates 3 STARS (hold)

Analyst: Stewart Glickman

With an apparent victory by President Bush in the election, we note that we would expect a Bush win to benefit oilfield services companies generally. However, we expect that KBR, the business unit involved in government and infrastructure work in Iraq, will continue to generate chronically low operating margins, and that Halliburton will continue to shift resources to its more profitable energy services group. Based on discounted-cash-flow and relative valuations, our 12-month target price remains at $38.

Cigna (CI): Maintains 3 STARS (hold)

Analyst: Phillip Seligman

Absent favorable prior-period claims development in this year's quarter, Cigna posted third-quarter operating earnings per share of $1.59, vs. $1.45, 23 cents above our estimate. Premiums and fees fell 10% and memberships 16%. We attribute health care segment's 86% rise in earnings to price hikes, better medical management, and lower costs. Given operating gains, we are raising our 2004 earnings-per-share estimate by 30 cents to $6.00. However, we see further membership declines amid competition. Assuming more cost cuts, we look for 2005 earnings per share of $6.20. Our target price is $68, a below-peer 11 times our 2005 earnings per share estimate.

Freddie Mac (FRE) and Fannie Mae (FNM): Reiterates 2 STARS (hold)

Analyst: Erik Eisenstein

Freddie Mac and Fannie Mae opened weaker today despite notable strength in the broader market. We see this as a fair reaction to the likely reelection of President Bush, as well as Republican gains in Congress. We think Congress will take another pass at reforming the companies in 2005, and that Republicans generally are more likely to consider issues pertaining to the implied government-sponsored subsidy, particularly if there are further adverse events in the Fannie Mae accounting controversy. We are cutting our target prices for Freddie Mac to $57 from $58, and for Fannie Mae to $59 from $61.

Countrywide Financial (CFC): Maintains 3 STARS (hold)

Analyst:

Countrywide Financial announced 2005 earnings-per-share guidance of $3.25 to $4.25. The assumptions underlying the new guidance are consistent with our projections, including that the company can take market share during the period. In our view, the biggest issue facing Countrywide in 2005 will be operating expense control in what we see as a smaller overall mortgage origination market. We are keeping our 2005 earnings-per-share estimate at $3.85 and our 12-month target price at $35; the latter reflects a lower p-e than most other financial institutions, but a slight premium to the shares' historical multiple.

PG&E (PCG): Reiterates 2 STARS (avoid)

Analyst: Justin McCann

PG&E posted third-quarter operating earnings per share of 57 cents, vs. 42 cents, in line with our estimate. The increase reflects the impact of rate increase and higher transmission revenues. Year-ago reported earnings per share of $1.23 included regulatory-approved recovery of previously uncollected purchased power costs. We still see 2004 earnings per share at $2.10 and 2005's at $2.20. PG&E hopes to restore its annual dividend payout at $1.20 in April, indicating a potential below peer yield of 3.8%. But we continue to believe PG&E shares are overvalued at nearly 15% of its p-e premium to peers and are maintaining our 12-month target price of $30.

Priceline.com (PCLN): Reiterates 4 STARS (accumulate)

Analyst: Scott Kessler

Excluding acquisiton-related costs, Priceline.com posted adjusted third-quarter earnings per share of 28 cents, vs. 20 cents, 1 cent above our estimate. GAAP earnings per share was 23 cnets, vs. 21 cents. Revenues fell 9%, and were 9% lower than our forecast, reflecting the hurricanes that hit the southeastern U.S., and dissuading travel to and from those areas. Opaque airline ticket sales were also below our expectations. However, we are maintaining our earnings-per-share forecasts of 88 cents for 2004 and $1.14 for 2005. Our 12-month target price remains $24, based on peer and discounted-cash-flow analyses. We continue to believe that Priceline.com is an attractive acquisition candidate.

Estee Lauder (EL): Reiterates 3 STARS (hold)

Analyst: Howard Choe

Estee Lauder posted September-quarter earnings per share of 41 cents, vs. 33 cents, 4 cents above S&P and Street estimates. Selling, general and administrative expenses were lower as a percentage of sales than we had expected. Total sales and operating profit rose 9% and 21%, respectively. Despite the 4-cent upside in this quarter, the company's updated earnings guidance for the first-half of fiscal 2005 (June) only raises the range by 1 cent to 96 cents to 99 cents. We expect a high level of marketing spend for the holiday season. Full-year fiscal 2005 guidance remains unchanged at $1.88 to $1.93.


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