Markets & Finance

S&P: Still Hold Circuit City


Circuit City (CC): Maintains 3 STARS (hold)

Analyst: Amy Glynn, CFA

Circuit City shares were up 17% Feb. 15 as Highfields Capital expressed interest in a buyout at $17 cash. Highfields says Circuit City's performance is being hindered partly by the requirements that come with being public. Circuit City says it will evaluate the proposal, as well as other alternatives, and has hired Goldman Sachs to assist. We think the offer will provide a catalyst for change at Circuit City, but fundamentally, we believe the company will continue to struggle against peer Best Buy. We are raising our 12-month target price by $2 to $17 to reflect Highfields' offer.

Qwest Communications (Q): Maintains 2 STARS (sell)

Analyst: Todd Rosenbluth

The company posted a fourth-quarter loss per share of 8 cents, vs. a loss of 23 cents, narrower than our 14-cent loss estimate. Results were aided by improved EBITDA margins, we believe from workforce cuts. We expect the quarter will have difficulty widening its margins in 2005 to near Bell-peer levels, given slower DSL growth, likely wage increases, and pricing pressure. We believe that the quarter is likely now to sit on the consolidation sidelines until regulatory clarity improves and we see this as added risk. Based on updated enterprise value/EBITDA analysis, we are lowering our target price to $3.50, from $4.00.

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

Analyst: Megan Graham-Hackett

January-quarter operating earnings per share of 20 cents, vs. 21 cents was in line with our estimate, but revenues (up 1% to $1.65 billion) were just shy of our model on weakness across the board in semis and in wireless handset test. A guided to flat sequential revenues in the April-quarter, a bit below our model, due to the sale of a business and weak markets. We trimmed our fiscal 2005 (ending October) earnings per share estimate of 3 cents to $1.16 on our lower revenue estimate, but raised our 12-month target price to $25 from $23 on Agilent's stronger cash flow generation, vs. our original forecast. With shares trading at price-to-shares in line with peers, we view Agilent as fairly valued.

KLA-Tencor (KLAC): Reiterates 4 STARS (buy)

Analyst: Colin McArdle

In order to return shareholder value and make use of a large cash balance of $1.9 billion as of Dec. 31 ,2004, KLA-Tencor announced its intention to pay a 12 quarterly dividend (1% implied yield) and repurchase 10 million common shares. We are encouraged by this move not only because we think it appropriate, given the current favorable tax environment, but also because we see this as a sign that the longer-term prospects for KLA-Tencor and the semi equipment industry remain favorable, and that it is not necessary for a company like KLA-Tencor to horde cash. Our peer group-based 12-month target price remains $56.

MBNA Corp. (KRB): Reiterates 5 STARS (strong buy)

Analyst: Evan Momios, CFA

We attribute MBNA's weak January credit quality metrics mainly to seasonality. Similar to January 2004, the net charge-off rate deteriorated while outstandings declined from strong December levels. We would regard near-term weakness in the stock as an enhanced purchasing opportunity. In our view, MBNA's current valuation does not reflect the better-than-average credit quality of its portfolio and the improved earnings consistency we expect. We reiterate our 2005 earnings per share estimate of $2.30 and our 2006 estimate of $2.55. Our target price remains $34, reflecting a peer multiple.

Medco Health Services (MHS): Maintains 3 STARS (hold)

Analyst: Phillip Seligman

Fourth-quarter earnings per share of 48 cents, vs. 43 cents is 2 cents above our estimate. Medco's revenue was below our projection on lower retail script volume and rise in generic volumes. We are encouraged by mail-order and generic penetration, which led to 13% rise in EBITDA per adjusted script. We still see 2005 earnings per share at $2.00. Pharmacy benefit managers have received bad press, we think, on a lack of transparency. We see Medco's services and reputation for efficiency outweighing customer and investor concerns. We are raising our forward p-e estimate on cash earnings per share to above-peer 19 times from 17.4 times, and target price by $4 to $46.

Alcatel (ALA): Reiterates 3 STARS (hold)

Analyst: Kenneth Leon, CPA

We believe Alcatel is best positioned in the communications equipment sub-industry to take advantage of expected growth from emerging WiMAX networks and devices. WiMAX is a set of standards aimed to provide broadband connectivity in wireless networks. Today, the company and Intel announced an expansion of their joint development agreement. Both firms expect WiMAX networks to be in commercial deployments by mid-2006. We see WiMAX as a new source of growth for Alcatel, whose traditional markets have slowed. Priced at 1 time our 2005 sales estimate, we would hold its shares.


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