Markets & Finance

S&P Keeps Hold on Krispy Kreme


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

Krispy Kreme Doughnuts (KKD): Reiterates 3 STARS (hold)

Analyst: Dennis Milton

Krispy Kreme posted October-quarter earnings per share of 4 cents, excluding one-time items, vs. 24 cents, 13 cents below our estimate. Systemwide same-store sales fell 6.4%. We are lowering our fiscal 2005 (Jan.) earnings-per-share estimate to 50 cents from 73 cents, our fiscal 2006 estimate to 70 cents from 95 cents, and our 12-month target price by $2 to $12, to account for recent sales and cost trends. At 7 times our fiscal 2005 EBITDA estimate, Krispy Kreme shares trade at a significant discount to peers. However, absent improved operating trends and resolution of the SEC investigation into Krispy Kreme's accounting for franchisee acquisitions, we would not add to positions.

Xerox (XRX): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Xerox reiterated its fourth-quarter 2004 and full year 2005 revenue and earnings per share guidance at its analyst meeting. The company sees 3% 2005 revenue growth, reflecting greater color adoption offset by a declining light lens market. We believe its sales mix should improve further, and that its 5% revenue growth target for 2006 is reasonable. The key to Xerox's growth strategy is services, in our view. We believe Xerox has articulated a better strategy than its peers, but we note the field is crowded. We see 91 cents 2005 earnings per share. At 17 times that estimate, and based on our discounted-cash-flow analysis, we view Xerox as fairly valued vs. peers.

Macromedia (MACR): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Scott Kessler

Macromedia shares rose 51% from Sept. 3 through the close on Friday, Nov. 19. Reflecting revised comparative p-e and p-e-to-growth analyses involving constituents of the S&P 400 Software Industry, we are raising our target price for Macromedia to $29 from $27. However, we are downgrading the stock based on valuation. Following its recent appreciation, we believe Macromedia is reasonably valued and offers only average appreciation potential.

Campbell Soup (CPB): Maintains 3 STARS (hold)

Analyst: Richard Joy

The company's October-quarter earnings per share of 56 cents, vs. 51 cents, is 4 cents above our estimate. Sales grew 10%, with volume/mix up 9%, currency adding 2%, and promotional spending subtracting 1%. Gross margin fell 150 basis points on higher raw material and packaging costs. Given October-quarter's upside, we are raising our fiscal 2005 (Jul.) earnings-per-share estimate by 3 cents to $1.69. We are encouraged by improving trends for core soup businesses, but see higher costs and difficult comparisons limiting near-term upside potential. We are raising our 12-month target price by $2 to $30, reflecting a peer average p-e of 17 times our calendar 2005 earnings-per-share estimate of $1.77.

Entergy (ETR): Reiterates 3 STARS (hold)

Analyst: Justin McCann

We see Entergy's agreement to sell its Gulf South Pipeline unit as the completion of its exit from energy trading and the pipeline business. Pending approvals, we expect the $1.14 billion sale to close by year-end, and for most of the over $1 billion net cash from this and the September 2004 Entergy-Koch Trading sale to be received by first-quarter 2005. We are raising our 2004 and 2005 earnings-per-share estimates by 5 cents each, to $3.80 and $4.75, with 2005 reflecting Entergy's planned $1.5 billion share buyback program. We are also raising our 12-month target price by $2 to $67, which approximates a peer p-e multiple on our 2005 estimate.

PeopleSoft (PSFT): Reiterates 3 STARS (hold)

Analysts: Jonathan Rudy, CFA; Scott Kessler

On Nov. 20, it was reported that 61% of PeopleSoft's outstanding shares were tendered in Oracle's offer of $24 a share for the company. Oracle again stated that $24 was its best and final offer, and requested PeopleSoft redeem its poison pill and exempt the transaction under Delaware Section 203. PeopleSoft's directors reaffirmed their opinion that Oracle's offer was inadequate. Oracle is now pursuing PeopleSoft in a Delaware court. Although the resolution of this situation is uncertain, we think PeopleSoft is reasonably valued at current levels, especially given Oracle's offer.

Oracle (ORCL): Reiterates 4 STARS (buy)

Analyst: Jonathan Rudy, CFA; Scott Kessler

On Nov. 20, it was reported that 61% of PeopleSoft's outstanding shares were tendered in Oracle's $24 per share offer for the company. Oracle reiterated that $24 was its best and final offer, and requested PeopleSoft redeem its poison pill and exempt the transaction under Delaware Section 203. PeopleSoft's Board of Directors reaffirmed its conclusion that Oracle's offer was inadequate. Oracle is now taking its fight for PeopleSoft to a Delaware court. Although the outcome of this situation is unclear, we still think Oracle is undervalued vs. peers, based on p-e and p-e-to-growth.

Freddie Mac (FRE): Reiterates 2 STARS (sell)

Analyst: Erik Eisenstein

Freddie Mac reported that its retained portfolio shrank fractionally in October, surprising us a bit, especially after fellow mortgage financier Fannie Mae reported a comparable 12% advance. Our overall 5% growth projection for Freddie Mac's 2004 retained portfolio is starting to look a bit less plausible. Still, we maintain our projection on our belief Freddie Mac may be able to take relative share from Fannie Mae in the coming two months, due in part to Fannie Mae's need to conserve capital. We also maintain our 2004 and 2005 earnings per share estimates for Freddie Mac of $4.85 and $6.87, and our 12-month target price of $57.

Note: Effective Novermber 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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