Markets & Finance

S&P: Microsoft, Motorola Still Strong Buys


Microsoft (MSFT): Reiterates 5 STARS (strong buy)

Analyst: Jonathan Rudy, CFA

Microsoft says CFO John Connors will be leaving the company to become a partner in a Seattle-area venture capital firm. Microsoft will interview internal and external candidates for the position, and Connors will help with the transition. While we are disappointed, we think that the company has a deep enough management team to potentially fill the role internally. However, if it decides to hire externally, it should be able to attract top CFO talent, in our view. We have a strong buy opinion on the shares due to Microsoft's strong cash flow and balance sheet, and market-leading position.

Motorola (MOT): Reiterates 5 STARS (strong buy)

Analyst: Kenneth Leon, CPA, Ari Bensinger

President and COO Mike Zafirovski announces his resignation from Motorola, effective Jan. 31. After being passed over for Motorola's CEO post in December 2003 in favor of company outsider Edward Zander, former COO of Sun Microsystems, we believe that Zafirovski is pursuing other CEO opportunities. With what we view as a growing portfolio of competitive handset products, we expect Motorola to gain market share in fourth-quarter and in 2005 with a strong global market seen for handset and wireless infrastructure. At one time our 2005 sales estimate, below peers, we view Motorola as attractive.

Intel (INTC): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Following a conference call, we are revising our earnings estimates. For the first quarter, we see a 5% sequential sales decline, on normal seasonality, and a 100 basis point quarter-over-quarter gross margin contraction, as the negative impact of lower sales and high start up costs should more than offset benefits of improved factory utilization. We are upping our first-quarter earnings per share estimate to 27 cents from 26 cents, full 2005 to $1.35 from $1.33, and 2006 to $1.34 from $1.27. However, given the recent reduction in peer valuations, we are cutting our 12-month target price by $2 to $26, based on our p-e and price-to-sales analyses.

Mylan (MYL): Reiterates 3 STARS (hold)

Analyst: Herman Saftlas

Mylan says it is "highly unlikely" it will consummate the proposed $4 billion acquisition of King Pharmaceuticals by Feb. 28, citing King's planned financial restatements. While the absence of dilution would be positive, and at this point we think the deal is unlikely to close at all, Mylan still faces competitive pressure in key generic lines. It also recently lost its patent challenge on Johnson & Johnson's Levaquin. On the plus side, we still see promise for Mylan's nebivolol heart drug. Our 12-month target price remains $20, using peer generics p-e on our calendar 2005 estimate.

Walt Disney (DIS): Reiterates 4 STARS (buy)

Analyst: Tuna Amobi, CPA, CFA

At a media and entertainment conference, COO Robert Iger keyed on initiatives to develop greater Disney-branded content that tap into a burgeoning market for wireless and hand-held/portable devices. We think emerging digital applications could provide viable platforms for long-term growth in ancillary revenues at its ESPN, Buena Vista/Touchstone, and ABC units. Iger also unveiled more details on a new pricing formula at Disney World begun December, 2004, aimed to stimulate visits and extend guest stays at hotels and theme parks. More details are likely on Feb. 1 with its fiscal first-quarter report.

HCA (HCA): Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analyst: Cameron Lavey

HCA gives preliminary fourth-quarter earnings per share guidance of 68 cents to 72 cents, up from previous guidance of 52 cents to 57 cents and ahead of our estimate of 55 cents. The upside was driven by three factors : a lower tax rate, which boosted earnings per share by 4 cents, share repurchase, which added 5 cents, and an adjustment to an estimated bad debt, which added 6 cents. Revenue guidance of $5.9 billion is below our estimate of $6.0 billion, as same-facility admissions remained weak. We are raising our 2004 earnings per share estimate by 12 cents to $2.56, and 2005's earnings per share estimate by 10 cents to $2.85. We are also raising our 12-month discounted-cash-flow-based target price by $10 to $43.

Genzyme (GENZ): Reiterates 4 STARS (buy)

Analyst: Frank DiLorenzo

Genzyme announced fourth-quarter revenue of $591 milion, $11 million above our view. Fourth-quarter Renagel sales of $99 million were $2 million above our forecast, Cerezyme sales of $219 million were $12 million above our estimate, and Fabrazyme sales of $64 million were $4 million above our view. Genzyme sees 2004 proforma earnings per share of $1.75 to $1.80, and 2005 earnings per share of $2.08 to $2.16. We are raising our 2004 estimate to $1.78 from $1.75, and 2005's to $2.12 from $2.10. We consider Genzyme a well-diversified growth story in the biotech space, and believe shares could trade at a p-e-to-growth ratio of 1.5 times. Based on this assumption, we are raising our target price to $70 from $67.

PartnerRe Ltd. (PRE): Maintains 3 STARS (hold)

Analyst: Gregory Simcik, CFA

The reinsurance firm estimates losses from tsunami damage in Southeast Asia to be $25 million to $35 million, spread among the non-life and life businesses. We think this level may be on the order of 3% to 4% of fourth-quarter consolidated earned premiums and may be less than 30% of the level of losses from the Florida hurricanes in the third quarter. We believe PartnerRe should be capable of absorbing the tsunami-related losses without significantly affecting its financial strength ratings. We are keeping our fourth-quarter operating EPS estimate at $2.12 and believe further reserve releases are possible in the quarter with the potential to offset much of the impact.


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