Markets & Finance

S&P Keeps Buy on Time Warner


Time Warner (TWX): Reiterates 4 STARS (buy)

Analyst: Tuna Amobi, CPA, CFA

Update: Before net one-time gains of 4 cents, Time Warner's fourth-quarter earnings per share of 20 cents, vs. 14 cents one year earlier, was 2 cents above our estimate and 4 cents above the Street's. Fourth-quarter results were again driven by the company's cable and network units, outweighing very tough film and TV comparisons. As we expected, AOL cost savings helped offset continued narrowband losses. Time Warner guided for high single-digit adjusted EBITDA growth in 2005 and, we calculate, $3.3 billion to $4.3 billion free cash vs. 2004's $3.3 billion. At its fourth-quarter meeting, the company outlined key 2005 priorities, and confirmed a reported joint Adelphia bid with Comcast, without further details.

After reviewing our models, we see 2005 revenue and EBITDA growth of 5% and 9%, and maintain our EPS estimate at 78 cents after 100 basis points of margin expansion. We see acceleration of free cash flow to over $4.5 billion in 2005, and reiterate our target price of $20, based on

discounted cash-flow and price-to-free cash flow. After a talk with the company's CEO following its fourth-quarter conference call, we think Time Warner is well positioned to capitalize on markedly improved financial flexibility as we expect a settlement in the near term of the SEC/Justice Dept. probe, while management reaffirms its desire to grow the company's cable footprint while continuing to mull a cable IPO.

DaimlerChrysler (DCX): Reiterates 3 STARS (hold)

Analyst: Efraim Levy, CFA

The Mercedes Car Group's global January sales volume fell 6%. DaimlerChrysler said Mercedes-Benz branded vehicles were hurt by delivery delays of diesel-powered vehicles. We think the changeover to new models was also a factor. We believe Mercedes-Benz sales will benefit from the introduction of new products over the next year. Smart brand vehicles were up 51%. Our recommendation is based on discounted-cash-flow analysis, and economic profit valuation of the core automotive business, with other items valued separately. As the shares are currently yielding 3.9%, we would hold DaimlerChrysler based on total return.

Ask Jeeves (ASKJ): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Before certain non-cash and non-recurring charges, Ask Jeeves posted fourth-quarter earnings per share of 35 cents, vs. 14 cents, 3 cents above our forecast. GAAP earnings per share was 25 cents, vs. 13 cents. Revenues rose 170%, reflecting the acquisition of Internet Search Holdings in May 2004. Given what we consider favorable traffic trends, we are raising our 2005 estimates for sales to $392 million from $390 million, and earnings per share to $1.40 from $1.38. But we are reducing our 2006 earnings per share estimate to $1.64 from $1.69, on our more conservative operating margin outlook. We are lowering our discounted-cash-flow-based target price to $29 from $32, based on relative and intrinsic analyses.

J.C. Penney (JCP): Reiterates 3 STARS (hold)

Analyst: Jason Asaeda

Same-store sales rise 3.3% and catalog/Internet sales fall 12.1% in January, in line with our expectations. Excluding last year's extra week, same-store sales and catalog/Internet sales increased 4.4% and 12.6%, respectively. We are maintaining our fiscal 2005 (ending January) earnings per share estimate of $2.32, as J.C. Penney sees January-quarter earnings per share of $1.08-$1.12, in line with our $1.11. But we are lifting our fiscal 2006 by 10 cents to $2.90, as we see growing catalog/Internet business contributing to higher operating margins. Based on updated p-e and discounted-cash-flow analyses, we are raising our target price by $3 to $45.

Instinet (INGP): Reiteratres 2 STARS (sell)

Analyst: Robert Hansen, CFA

Fourth-quarter pro forma earnings per share of 4 cents, vs. 1 cent is above our 3 cents estimate, aided by higher market volumes. We see lower 2005 revenue capture per share traded because of volume-based pricing pressure and a customer mix shift towards algorithmic and electronic trading. We expect Instinet to submit its application to become an exchange in the third quarter, which we think would narrow its competitive disadvantage. We are leaving our 2005 earnings per share estimate at 20 cents, aided by lower salaries and aggressive cost cuts but hurt by higher stock-based compensation. Our target price goes to $5 from $4.50, or 25 times our 2005 estimate.

Target (TGT): Reiterates 3 STARS (hold)

Analyst: Jason Asaeda

Same-store sales rose 5.8% in January, beating our projected 5% increase. Despite a tough year-ago 8.0% rise, Target sees same-store sales up 4% to 6% in February, compared with the 2.5% we had forecast. Given favorable sales trend and outlook, we are raising our fiscal 2006 (ending January) revenue target to $51.8 billion from $51.4 billion. But after factoring out 2 cents to 3 cents in projected annual option expense, our fiscal 2005 and fiscal 2006 estimates are unchanged at $2.22 and $2.60. Even so, we are raising our 12-month target price by $5, to $55, based on our updated discounted-cash-flow and p-e analyses.

Corning (GLW): Maintains 3 STARS (hold)

Analyst: Ari Bensinger

At its annual investor meeting, Corning confirms first-quarter guidance for sales of $980 million to $1.03 billion and earnings per share of 11 cents to 13 cents. It expects liquid crystal display glass market (30% of sales) to grow 40% to 60% in 2005, aided by increased penetration of LCD televisions. It also sees solid growth in telecom market (40% of sales) from accelerated fiber-to-home deployments by big carriers Verizon, SBC Communications, and BellSouth. Corning also expects the diesel emissions control market (15%) to improve after 2006, driven by tighter U.S. regulatory requirements.

Icos Corp. (ICOS): Reiterates 5 STARS (strong buy)

Analyst: Frank DiLorenzo, CFA

Icos posted a fourth-quarter loss per share of 53 cents, vs. a 5-cent loss, a penny narrower than our estimate. Global Cialis sales were $552.3 million, as previously reported. Icos sees global sales at $775 million to $850 million for 2005. We forecast 2005 Cialis sales at $824 million, up from our prior $796 million view. Data for Phase II trial of Cialis to treat enlarged prostate expected by year-end 2005. We estimate a 2005 loss per share of $1.07 (up from $1.04 loss) and earnings per share of 28 cents for 2006 (up from 24). On our net present value analysis, which assumes peak North American/EU Cialis sales of $1.5 billion by 2012, our target price remains $35.

Maxtor Corp. (MXO): Downgrades to 2 STARS (sell) from 3 STARS (hold)

Analyst: Richard Stice, CFA

Maxtor posted a fourth-quarter operating loss per share of 28 cents, vs. earnings per share of 15 cents, 7 cents wider than our estimate. Revenue declined 12%. The company sees a relatively stable inventory and pricing during first-quarter. As a result, Maxtor guides first-quarter revenue and loss per share to be better than our forecast. However, we remain concerned with Maxtor's competitive position, product depth, and recent management turnover. As a result, we are widening our 2005 loss per share estimate to 34 cents from 8 cents. Our new 12-month target price of $4, lowered from $6, is based on updated discounted-cash-flow and relative analyses.


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