Markets & Finance

S&P Downgrades Morgan Stanley


Morgan Stanley (MWD): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Robert Hansen, CFA

Morgan Stanley posted November-quarter earnings per share of $1.09, vs. 92 cents, above our 88-cent estimate, aided by lower tax rate and compensation ratio. Proprietary trading revenue rebounded from a depressed August-quarter but lagged our projection. We think earnings quality has declined and see a greater reliance on net interest income. We are lowering our fiscal 2005 (ending November) earnings per share estimate to $4.00 from $4.25. Our target price stays at $55, or nearly 14 times our fiscal 2005 estimate, below peers. We expect Morgan Stanley to lose market share in retail brokerage, credit card, and asset management segments in fiscal 2005 and would not add to positions.

IAC/InterActive Corp. (IACI): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Shares were up sharply in pre-market trading, following this morning's announcement that InterActive would spin-off its travel businesses as a new publicly traded company called Expedia, pending necessary approvals. InterActive's Chairman and CEO Barry Diller would retain these posts, and also serve as Chairman of Expedia. Dara Khosrowshahi, who in November was announced as the incoming President and CEO of IAC Travel, would take on those roles at Expedia. We view favorably this proposed separation, believing it would reduce InterActive's complexity and promote greater corporate focus and flexibility.

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

Analyst: Megan Graham-Hackett

Agilent announced it filed a patent infringement lawsuit against Elan Microelectronics related to its optical mouse sensor technology. Agilent has pointed to its technology related to this field as it emphasizes its research and development capabilities to investors, and we believe it will vigorously pursue this case. Indeed, Agilent previously field a lawsuit against PixArt Imaging Inc., also related to the optical mouse sensor, which is pending. We continue to view Agilent as worth holding in light of what we see as its healthy cash flow and with shares trading in line with peers on a price-to-sales basis.

Barnes & Noble (BKS): Maintains 3 STARS (hold)

Analyst: Jason Asaeda

Barnes & Noble is accepting pre-orders for J.K. Rowling's "Harry Potter and the Half Blood Prince," to be released on July 16. We look for strong sales of the book to help offset the absence of revenues next year from Barnes & Noble's former stake in GameStop Corp. Balancing the expected sales lift against the gross margin impact of the book's 40% discounted price, we are increasing our fiscal 2006 (ending January) earnings per share estimate by 6 cents to $2.10. We still see fiscal 2005 at $2.03. We are raising our 12-month target price by $7 to $34, blending our updated p-e, price/sales and discounted-cash-flow analyses.

Bear Stearns (BSC): Reiterates 5 STARS (strong buy)

Analyst: Robert Hansen, CFA

Bear Stearns posted November-quarter earnings per share of $2.61, vs. $2.19, above our $2.13 estimate. Results were aided by strength in the fixed income area, improved equity markets, higher prime brokerage and clearing volumes, and higher asset management fees. We see increased investment banking revenue, higher net interest margins and solid merchant banking gains in fiscal 2005 (ending November) to offset a modest decline we see in Bear Stearn's fixed income franchise. We are increasing our fiscal 2005 earnings per share estimate to $9.25 from $9.00. We are raising our target price to $130 from $120, 14X times our fiscal 2005 earnings per share estimate, a discount to peers.

Micron Technology (MU): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Ahead of Micron's November-quarter earnings release, we see earnings per share of 23 cents for the quarter and 66 cents for full fiscal 2005 (ending August). We expect November-quarter sales to benefit from healthy unit volume gains and stable pricing. We believe that inventory within the company's distribution channel remains at relatively low levels. However, we would be watchful for a potential imbalance in supply and demand over the next 12 months, as Micron ramps 300mm production. Our 12-month target price of $13 is based on our price-to-sales model, and values the stock at a discount to its historical average price-to-sales multiple.


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