Markets & Finance

S&P Keeps Buy on Pixar


Pixar (PIXR): Maintains 4 STARS (buy)

Analyst: William Mack, CFA

Pixar posted third-quarter earnings per share of 38 cents, vs. 23 cents, ahead of our 32 cents forecast. Upside to our estimate was driven by Monsters Inc. home-video sales. Profits from Finding Nemo continued strong in the quarter. We are raising our 2004 earnings-per-share estimate to $2.57 from $2.50, and maintaining 2005's at $1.95. We think Pixar, helped by the global release of The Incredibles and holiday DVD sales, will end the year with a net cash balance approaching $1 billion. To reflect a slightly lower risk profile and aided by this cash surplus, we are raising our discounted-cash-flow-based target price to $92 from $84.

Dell (DELL): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Dell posted October-quarter earnings per share of 33 cents, vs. 26 cents a year ago, in line with estimates. Revenues rose 18%. While Dell continues to gain share, aided by declining component costs, its January-quarter revenue guidance of $13.5 billion matched our model, and earnings-per-share guidance of 36 cents is a penny ahead. We are raising our fiscal 2005 (January) estimate by one cent to $1.28. Our S&P Core earnings-per-share estimate for fiscal 2005 is 81 cents, reflecting projected stock option expenses. Dell continues to execute well. But we believe the potential for upside surprises is limited, and with its shares above peers on a price/sales basis, we view Dell as fairly valued.

Allstate (ALL): Reiterates 5 STARS (strong buy)

Analyst: Catherine Seifert

Allstate plans to curtail writing new homeowners policies in Florida, pending the resolution of legislative proposals that may change how an insurer can underwrite and price these policies. We view this as prudent, though there may be a public relations backlash. Although we expect the sector to come under pressure today amid reports the New York attorney general is set to file another lawsuit, we still view Allstate as undervalued at 8.6 times our 2005 earnings-per-share estimate, with limited exposure to this probe. Our target price of $63 assumes expansion in the forward p-e to a peer-average 11 times 2005 estimate.

Ericsson (ERICY): Maintains 3 STARS (hold)

Analyst: Ari Bensinger

At its capital market day yesterday, Ericsson highlighted its wireless infrastructure market outlook. It sees the 2005 global mobile systems market up slightly, hurt by an abatement of catch-up 2G spending from previous limited investment. Longer term, Ericsson forecasts continued solid wireless subscriber and traffic growth, fueled by the proliferation of higher wireless data applications. We see significant growth opportunities becoming available as the market transitions to 3G networks. However, the exact timing of widespread 3G deployments remains uncertain.

Kohl's (KSS): Maintains 3 STARS (hold)

Analyst: Jason Asaeda

October-quarter earnings per share of 42 cents, vs. 35 cents, misses our estimate by a penny. Kohl's reports good initial customer response to the new Daisy Fuentes and Apt. 9 fashions, plus other line updates. We also think Kohl's stores are easier to shop because of controlled inventories. We still see fiscal 2005 (January) earnings per share at $2.15, but are lifting fiscal 2006's by 3 cents to $2.58. We think Kohl's operates a mature retail concept, but expect top-line benefit from a planned launch of more fresh product. With a 12-month target price of $55, raised today by $7 on updated p-e, price/sales and discounted-cash-flow analyses, our recommendation remains hold.

Payless Shoesource (PSS): Reiterates 5 STARS (strong buy)

Analyst: Mark Basham

October-quarter earnings per share of 17 cents before the restructuring charge, vs. a year-ago loss of 3 cents, is well above our 14 cents estimate. We view the better-than-expected performance as a sign that Payless Shoesource's strategic restructuring is gaining traction, and we now see more substantial benefits in fiscal 2006 (Jan.). We are raising our fiscal 2005 operating earnings-per-share estimate to 69 cents from 65 cents and fiscal 2006's to $1.00 from 85 cents. We see the restructuring providing significant free cash flow as underperforming assets are liquidated, and are raising our discounted-cash-flow-based 12-month target price to $16 from $14.

Agilent Technologies (A): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Agilent posted October-quarter earnings per share of 30 cents, vs. 15 cents, a penny below our estimate. Revenues of $1.8 billion were below our $1.9 billion estimate as Automated Test Equipment fell 25%. Agilent doesn't see a correction in semiconductor testing lasting more than two quarters, due to the stabilization of utilization rates. But management's January-quarter guidance of $1.6 billion to $1.7 billion in revenue and earnings per share of 14 cents to 21 cents is below our $1.8 billion and 27 cents respective estimates. We are reducing our fiscal 2005 (Oct.) earnings-per-share estimate to $1.24 from $1.52. We note cash-flow generation was stronger than we thought, but with shares trading at per share of 1.8 times, in line with peers, we view shares as fairly valued.

HCA (HCA): Downgrades to 1 STAR (strong sell) from 2 STARS (sell)

Analyst: Cameron Lavey

We believe that the recent rise in share price reflects HCA's Dutch auction share repurchase, and expect valuations ahead will reflect underlying business fundamentals. We think that industry fundamentals remain challenging and are unlikely to improve over the next several quarters. Bad debt expense, weak volumes, and a shift to lower paying insurance plans will continue to pressure revenue and earnings growth, in our view. We are maintaining our 2004 earnings-per-share estimate of $2.44 but are lowering 2005's by 5 cents to $2.75. Our 12-month target price remains $33.

Charles Schwab (SCH): Maintains 2 STARS (sell)

Analyst: Robert Hansen, CFA

Schwab posted October trading volumes significantly higher than September's, and says activity has risen 23% so far in November, from October. We are impressed by the pickup in volume, but are leaving our earnings-per-share estimates unchanged at 37 cents in 2004 and 45 cents in 2005, given that we had expected a rebound from a seasonally weak second-quarter, and based on lower commission rates. However, we are raising our 12-month target price to $9 from $8, or 20 times our 2005 earnings-per-share estimate, on higher peer valuations. Although we see improved trading volumes, we think a premium valuation makes Schwab's shares unattractive.


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