Markets & Finance

S&P Says Hold Intel


Please see the note below regarding changes to Standard & Poor's STARS ranking system.

Intel (INTC): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Intel and NVIDIA (NVDA) signed a broad, multi-year cross-license agreement, as well as an agreement for NVIDIA to license Intel's front-side bus technology. We see the deal as a positive development for Intel, since it should allow the company to closely integrate its chip technology with NVIDIA's graphics processors, without infringing on any patents. We note that Intel also has a similar cross-licensing agreement with graphics chipmaker ATI Technologies. We are keeping our 12-month target price for Intel at $27, based on our p-e and price-to-sales analyses.

Walt Disney (DIS): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

After its fourth-quarter call and talk with senior management, we see improving fundamentals reflecting surging ABC ratings, a U.S. parks rebound, solid ESPN ratings, Disney Channel expansion, a stronger film slate, and pending Disney Store royalties. But we see risks such as the pending NFL contract extension, possible labor disruption at theme parks, recent Euro Disney consolidation and negative press on corporate governance. We still see fiscal 2005 (September) earnings per share of $1.26, but are raising our target price by $3 to $29, on revised discounted-cash-flow, relative enterprise value/EBITDA and price/free-cash-flow analyses.

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

Analyst: Gregory Simcik, CFA

Marsh & McLennan announced that five insiders have stepped down from its board of directors and that the board has deferred a decision on its first-quarter 2005 dividend. We believe the reduction in board insiders is a positive, as both clients and investors want more outside supervision of the company, in our view. Marsh & McLennan declared its 34 cents fourth-quarter dividend payable on Nov. 15, which was permitted under a bank facility waiver. We believe Marsh & McLennan may ultimately reduce future dividends, pending possible legal and regulatory settlements and ongoing negotiations with bank lenders on a new credit facility.

Fannie Mae (FNM): Reiterates 2 STARS (sell)

Analyst: Erik Eisenstein

Fannie Mae's mortgage portfolio grew 12.2% in October, below September's 12.9% growth. Consistent with our estimate, Fannie Mae also expects its overall 2004 portfolio growth to be close to zero, after shrinkage during the first five months of the year. The company cites a decline in the relative share of fixed rate mortgages, as well as an agreement with its regulator to maintain a 30% capital surplus. To us, this suggests that controlling the mortgage portfolio will at least be a part of Fannie Mae's plan to meet the agreement. We're keeping our $7.73 2005 earnings-per-share estimate and our 12-month target price of $56.

Gap (GPS): Reiterates 4 STARS (buy)

Analyst: Marie Driscoll, CFA

Gap posted third-quarter earnings per share of 28 cents, vs. 28 cents a year ago, meeting our estimate, on 1% higher sales. We see its balance sheet still improving, with $3.7 billion in cash. Business slowed during the summer, reflecting an industry trend, but the early response to holiday merchandise is strong. Gap sees the lifting of the U.S. quota as a plus for the second-half of fiscal 2006 (January) sourcing. We see opportunities in its new concept targeting 35+ aged women, Banana Republic's Japan entry, tweaking of merchandise assortment, and expansion into adjacent categories. We see $1.27 fiscal 2005 earnings per share, and $1.51 in fiscal 2006. Our 12-month target price is $25.

Novell (NOVL): Reiterates 3 STARS (hold)

Analyst: Jonathan Rudy, CFA

Novell posted October-quarter operating earnings per share of 6 cents, vs. 5 cents, a penny below our estimate. Revenues of $301 million were also slightly below our expectations. Results were driven by growth in SUSE Linux, Identity, and Resource Management product offerings. After the recent legal settlement with Microsoft (MSFT), Novell has about $2.90 per share in net cash/investments. We are lowering our fiscal 2005 (October) earnings-per-share estimate to 17 cents from 22 cents. Despite inconsistent execution, in our view, we would hold the shares, trading at discount to peers on enterprise value-to-sales basis.

UnumProvident (UNM): Reiterates 3 STARS (hold)

Analyst: Gregory Simcik, CFA

UnumProvident reaches an agreement with lead states Massachusetts, Maine, and Tennessee for a proposed settlement on the review of past cases for market-conduct issues. UnumProvident expects 49 states and jurisdictions to vote on the agreement in the fourth quarter, and sees a 29 cents settlement charge. We think initial reserves for reopened claims may increase, and the company could be subject to added charges, including class-action awards, penalties from non-participating states, and possible remedies from lawsuit by California regulators on contingent commissions. We also would not look for credit/financial strength ratings to improve due to uncertainty.

JLG Industries (JLG): Maintains 3 STARS (hold)

Analyst: Anthony Fiore, CFA

JLG posted an October-quarter loss per share of 20 cents, vs. 1 cent earnings per share, far below our estimate. Revenues rose 44% as high utilization and rental rates led to strong replacement demand for aerial work platforms and telehandlers. Margins were hurt by higher-than-expected steel prices, and by production inefficiencies from component shortages and costs of expediting. We still think JLG will benefit from improved commercial construction activity, but see net unrecovered steel costs limiting future margin expansion. Accordingly, we are lowering our fiscal 2005 (July) earnings-per-share estimate to $1.05 from $1.27.

Note: Effective Nov. 12, 2004, Standard & Poor's has modified its Stock Appreciation Ranking System (STARS) nomenclature:

5 STARS now designates a stock ranked strong buy, instead of the previous buy;

4 STARS is now buy, instead of accumulate;

2 STARS is now sell, instead of avoid; and

1 STARS is now strong sell, instead of sell.

The 3 STARS ranking remains as hold.


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