Markets & Finance

S&P Maintains Avoid on Merck


Merck (MRK): Reiterates 2 STARS (avoid)

Analyst: Herman Saftlas

Merck announced that a SEC inquiry believed to focus on the adequacy of past Vioxx disclosure risks, and a Justice Department criminal probe related to Vioxx-related research and development, and marketing. We think, if found guilty, Merck's eligibility for Medicaid/Medicare reimbursement could be at risk. We also are concerned that Merck could face over $10 billion in Vioxx-related legal liabilities, which should be covered by annual cash flow of over $6 billion and cash and investments of $13 billion. We are lowering our target price by $3 to $23, factoring in revised

p-e and

discounted-cash-flow assumptions.

AT&T (T): Maintains 3 STARS (hold)

Analyst: Todd Rosenbluth

As expected, the FCC approved a petition from privately-owned Vonage Holdings that would exempt it and other Voice over IP (VoIP) providers such as AT&T from being required to seek certification before offering service in an additional state, as well as shield it from rate regulation. While we await a likely federal appeals ruling, as well as clarity from the FCC regarding the impact of access charges and universal service, we believe this decision encourages VoIP rollouts. We see AT&T as positioning itself to be among the beneficiaries of a lightly-regulated technology.

Marsh & McLennan (MMC): Maintains 3 STARS (hold)

Analyst: Gregory Simcik, CFA

Marsh & McLennan posted third-quarter earnings per share of 4 cents, vs. 65 cents, 69 cents below our estimate. Settlement charges totaled 34 cents and lower contingent commissions reduced earnings per share by 16 cents. Marsh & McLennan also announced layoffs and further cost cuts to save $400 million annually, less than 50% of lost contingents. We believe further settlement reserves and cutbacks may be needed, especially in a soft insurance market. We also believe that up to $130 million in third-quarter contingents may be recognized in future periods, and we are curious about the inclusion of a settlement reserve in the third quarter, not the fourth quarter.

Electronic Arts (ERTS): Reiterates 4 STARS (accumulate)

Analyst: Jonathan Rudy, CFA

Electronic Arts cut prices of Madden NFL 2005, NBA Live 2005, and NHL 2005 to $29.95, and NCAA Football 2005 to $39.95. While these price cuts respond to competition from Take-Two Interactive (TTWO) and Sega ESPN sports titles, with Madden NFL 2005 already having sold over 4 million copies, we believe the cut also reflects the typical seasonal slowdown in this title after the start of the NFL season, which is a similar pattern for the other sports titles. With the industry's most diversified brand library, we believe that Electronic Arts remains attractive at a p-e-to-growth discount to peers.

Janus Capital (JNS): Reiterates 1 STAR (sell)

Analyst: Robert Hansen, CFA

Janus reported assets under management of $131 billion at October end, up nearly 1% from the end of the third quarter. We are unimpressed with the rise, given greater gains in the S&P 500 and Nasdaq indexes, coupled with net outflows from Janus of $0.5 billion. We expect significant net outflows in the fourth quarter, including expected redemptions of about $5 billion by ING. We are leaving our operating earnings-per-share estimates unchanged at 64 cents for 2004 and 55 cents for 2005. Our 12-month target price stays at $11, at 20 times our 2005 earnings-per-share estimate and a premium to peers. We view the premium in the shares now, at 28 times our 2005 estimate, as unwarranted.

Advanced Micro Devices (AMD): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

AMD and chip foundry Chartered Semiconductor (CHRT) announced a sourcing agreement, whereby Chartered will adopt part of AMD's manufacturing technology and become an additional manufacturing source of AMD64 processors. AMD plans to have Chartered begin production in 2006. We believe the sourcing deal is a positive for AMD, since it should provide incremental capacity without many of the risks associated with owning an additional fab. However, we view AMD shares as fairly valued now, though we are upping our 12-month target price to $18 from $16 based on an updated price-to-sales analysis.

EchoStar Communications (DISH): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

Echostar's third-quarter earnings per share of 22 cents, on 6% fewer shares, vs. 7 cents, is well above our view and 1 cent below the Street's. More stock was repurchased than we expected. A strong 350,000 in net subscriber adds were about in-line with forecasts and drove 28% revenue growth, with pricing (ARPU) up 10%. EchoStar also reined in subscriber acquisition costs, which fell 10%. A bit surprisingly, the company declared a special dividend of $1/share, to holders of record as of Dec. 8. With the changing landscape, we think the company is on a new quest to return some capital to shareholders.

Cablevision (CVC): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

Before our estimate of 4 cents net one-time gains, Cablevision's third-quarter per share loss of 26 cents, vs. 37-cent loss is much narrower than S&P and Street forecasts. We see subscriber growth generally strong as pricing held up. The growth was likely fueled by triple-play promotion, and digital phone adds marked at an all-time high. Rainbow Media networks were solid, in our view. But churn was more adverse than we expected. Start-up losses are mounting at imminent spin-off venture Rainbow DBS as subscriber growth stays anemic in our view. Cablevision slightly raises Rainbow Media guidance abd affirms its Telecom unit at a slightly higher end of its prior range.


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