Markets & Finance

S&P: Still Sell Fannie after Raines Exit


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

Analyst: Erik Eisenstein

Chairman and CEO Raines and CFO Howard depart Fannie Mae, with interim successors named. We view this as a positive for Fannie Mae, and see an improved relationship with regulator Office of Federal Housing Enterprise Oversight (OFHEO), which is still investigating the company. The departed executives contested the OFHEO's findings of accounting deficiencies. In our view, the two also had limited credibility to address the corporate governance issues raised by the OFHEO, important in its own right, and also to rehabilitate Fannie Mae's political image prior to a likely regulatory reform debate. We are raising our 12-month target price by $3 to $59.

Qualcomm (QCOM): Reiterates 5 STARS (strong buy)

Analyst: Kenneth Leon, CPA, Todd Rosenbluth

Qualcomm pre-announced December-quarter earnings per share of 26 cents to 27 cents, above previously announced guidance of 24 cents to 26 cents, which is mostly in line with our 26-cent estimate. Based on the shipment of approximately 39 million MSM phone chips, the company sees revenues of about $1.4 billion, in line with our estimate. Base on a p-e multiple of 35 times applied to our fiscal 2006 (ending September) $1.50 earnings per share estimate, a premium to peers that we think is warranted by above-average growth potential, our 12-month target price is $53. In our view, risks to our opinion and target price are dependent on CDMA global handset demand.

Research In Motion (RIMM): Maintains 3 STARS (hold)

Analyst: Kenneth Leon, CPA, Todd Rosenbluth

Research In Motion posted third-quarter earnings per share of 58 cents, vs. 10 cents, before special items, 6 cents above our estimate. Revenue for the third-quarter grew 18% from the prior year period, and BlackBerry handheld sales were 71% of total revenue. We are raising our fiscal 2005 (ending February) earnings per share estimate to $2.05 from $1.95, and our fiscal 2006 estimate to $3.15 from $2.80. The company did not comment on a recent court ruling regarding patent infringement. Although the stock is valued above peer levels at 42 times our 2005 earnings per share estimate, we would hold the shares based on our view of Research In Motion's superior growth.

A.G. Edwards (AGE): Downgrades to 2 STARS (sell) from 3 STARS (hold)

Analyst: Robert Hansen, CFA

A.G. Edwards posts November-quarter earnings per share of 63 cents, vs. 49 cents, above our 57 cents estimate, aided by a rebound from the August-quarter in commissions and asset management revenues, and lower compensation expense than expected. However, we see more pressure on commission rates and market-share losses in fiscal 2-06 (ending February). We maintain our fiscal 2005 earnings per share estimate of $2.25, but are lowering our fiscal 2006 estimate to $2.60 from $2.70. Our target price stays at $36, nearly 14 times our fiscal 2006 estimate, comparable to peers. We like A.G. Edward's focus on fee-based accounts, but think it lacks competitive advantage and view its valuation as unattractive.

Blockbuster (BBI): Downgrades to 2 STARS (sell) from 3 STARS (hold)

Analyst: Amy Glynn, CFA

Blockbuster lowers its monthly subscription price to $14.99 from $17.49, further undercutting rival NetFlix, currently at $17.99/month. With Blockbuster customer loyalty we see as low, we think the move will help lure subscribers, but we question the profitability impact. We also see a high probability that NetFlix will lower pricing in response, noting that it was charging about $22 as recently as October. We view pricing war as detrimental to online players, as well as to in-store rental market. Trading above our $9 12-month target price, we are downgrading Blockbuster to sell.

OfficeMax (OMX): Maintains 3 STARS (hold)

Analyst: Michael Souers

OfficeMax announced that its retail sales and gross margins during the Thanksgiving-to-Christmas holiday season have been weaker than expected. The company now expects flat fourth-quarter comparable sales year-to-year. We are lowering our 2004 earnings per share estimate to $1.34 from $1.40 and 2005's to $1.95 from $2.33 based on our view of continued sluggish sales. Although we believe OfficeMax is slightly undervalued from an intrinsic value standpoint, we do not envision any near-term catalysts to drive its shares significantly higher. We are lowering our 12-month discounted-cash-flow-based target price to $32 from $33.

Endo Pharmaceuticals (ENDP): Maintains 4 STARS (buy)

Analyst: Cameron Lavey, Jeffrey Loo, CFA

Endo Pharmaceuticals's guides for 2005 sales of $650 to $660 million and earnings per share of $1.18 to $1.20, below our forecasts of $835 million and $1.35. Its guidance does not include contributions from its generic transdermal fentanyl patch or generic oxycodone ER. We believe that these products will likely be launched in 2005, which we think could add up to $150 million in sales and 11 cents in earnings per share. We think Endo Pharmaceuticals has a strong pipeline of generics that should drive sales and earnings per share growth over the next three years. Our 2004 earnings per share estimate remains at $1.07 and 2005's at $1.35, and our 12-month discounted-cash-flow-based target price stays at $26.


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