Markets & Finance

S&P Keeps Strong Buy on News Corp.


News Corp. (NWS): Reiterates 5 STARS (strong buy)

Analysts: Tuna Amobi, CPA, Thomas Graves, CFA

News Corp. proposed a stock swap for the 17.9% of Fox Entertainment (FOX

; 3 STARS, hold) it does not already own. The transaction could close by the end of the March quarter, subject to approvals. Based on the proposed terms, News Corp. says it expects the deal to be accretive to fiscal 2005 (ending June) earnings per share. However, we expect pressure from Fox shareholders to

boost the value of the transaction. Even with a higher swap value, we expect News Corp. shares to benefit in the year ahead from the company's global satellite TV footprint, surging cable networks, vertical integration, business and

geographic diversification, transparent earnings quality, and strong balance sheet.

Alltel (AT): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Todd Rosenbluth

Alltel has agreed to acquire Western Wireless for 0.535 shares of Alltel and $9.25 in cash, in a deal likely to close in mid 2005, subject to shareholder and regulatory approvals. We believe the deal will likely be modestly dilutive in 2005. However, we see Western Wireless's growth coming principally from overseas operations with lower EBITDA margins, and thus providing limited immediate synergies for Alltel's domestically-based high EBITDA margin rural wireline and wireless operations. We are lowering our blended relative and discounted-cash-flow-based 12-month target price for Alltel to $60 from $62.

Western Wireless (WWCA): Maintains 3 STARS (hold)

Analysts: Kenneth Leon, CPA, Todd Rosenbluth

Western Wireless agrees to be acquired by Alltel for 0.535 Alltel shares and $9.25 cash per Western Wireless share in a deal likely to close in mid 2005, subject to shareholder and regulatory okays. Alltel's purchase price values Western Wireless at an enterprise value/EBITDA of 8 times our 2005 estimate, a more than 30% premium to our initial net asset value calculation. We believe the planned deal will likely be modestly dilutive in 2005 for Alltel and we are uncertain if Western Wireless's international operations will be spun off. We are raising our 12-month target price for Western Wireless to $39 from $29, based on the favorable terms.

Blockbuster (BBI): Maintains 2 STARS (sell)

Analyst: Amy Glynn, CFA

Movie Gallery announced a pact to buy Hollywood Entertainment at $13.25/share, topping Blockbuster's $11.50 bid. Blockbuster previously said it would consider raising its offer, but has not commented on the news today. The proposed deal requires the approval of Hollywood holders, including Carl Icahn, who previously supported the Blockbuster-Hollywood merger. We think the Movie Gallery-Hollywood merger will create stiffer competition for Blockbuster, but do not think a Blockbuster-Hollywood merger would make strategic sense, since it would boost Blockbuster presence in a declining retail video rental space. We are trimming our Blockbuster 12-month target price by 50 cents to $8.50.

Red Hat (RHAT): Initiates coverage with 3 STARS (hold)

Analyst: Jonathan Rudy, CFA

We anticipate that this provider of open-source software, including the Red Hat Linux operating system, will increase revenue 58% in fiscal 2005 (ending February) and 40% in fiscal 2006. We believe overall Linux market-share growth will continue to come at the expense of Unix. We expect earnings per share of 24 cents in fiscal 2005 and 33 cents in fiscal 2006. Despite our belief that Red Hat is a leader in a fast growing market, we would not add to positions, based on our view of recent inconsistent execution, and with the shares trading at a premium to peers on enterprise value/sales basis. Based on relative valuation metrics and our discounted-cash-flow model, our target price is $13.

3M (MMM): Maintains 3 STARS (hold)

Analyst: Anthony Fiore, CFA

Ahead of its fourth-quarter report, scheduled for Jan. 18, we see 3M posting 7% higher sales of $5.0 billion, based on our belief that the company likely experienced broad-based strength across many of its end markets during the quarter. In addition, we anticipate 3M will benefit from sales of its Aldara Cream, an immune response modifier drug that is used to fight cancer. All told, we forecast fourth-quarter earnings per share of 91 cents, vs. 77 cents in the year-ago period. We are raising our 12-month target price to $86 from $80, reflecting our revised discounted cash flow and p-e analyses.

Boston Scientific (BSX): Maintains 4 STARS (buy)

Analyst: Robert Gold

Boston Scientific says preliminary net sales for the fourth quarter were $1.6 billion, including a $35 million benefit from foreign exchange, with global Taxus stent sales reaching $691 million. These sales figures would be slightly ahead of the S&P forecast, though Taxus alone would be about $80 million below our fourth-quarter estimate. Looking to 2005, Boston Scientific says the absence of the drug-coated stent in Japan, and overall pricing pressures in that market, will impact 2005 operating income by about $70 million. We maintain our 2004 earnings per share estimate of $1.61, but we are trimming 2005 estimate by 10 cents to $2.10. Despite the revised 2005 outlook, we view Boston Scientific positively at 16 times our 2005 estimate and a 38% discount to peers.


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