Markets & Finance

S&P Keeps Buy on Applied Materials


Applied Materials (AMAT): Maintains 4 STARS (buy)

Analyst: Colin McArdle

Applied Materials reports first-quarter earnings per share of 17 cents, vs. 5 cents, a penny ahead of our estimate. Gross margins were lower than we expected, due primarily to mix shift, but were offset by what we consider to be aggressive operating expense cuts. Due to our lower gross margin assumptions, we are cutting our fiscal 2005 (ending October) earnings per share estimate to 79 cents from 91 cents. We continue to believe the industry slowdown that started in the second half of 2004 will reverse itself starting in the second half of 2005 as inventories correct and chip demand rebounds. We are maintaining our peer-group based 12-month target price of $21.

Network Appliances (NTAP): Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analyst: Richard Stice, CFA

Network Appliances posted January-quarter operating earnings per share of 16 cents, vs. 11 cents, in line with our estimate. Revenues rose 10% quarter over quarter. Gross margin of 61.3% came in slightly above our estimate. Network Appliacnes says it is not seeing any unusual pricing patterns. We are keeping our fiscal 2005 (ending April) earnings per share estimate at 62 cents. Our new target price of $31, raised from $22, is based on updated discounted-cash-flow and relative valuation analyses. We believe this morning's premarket double-digit percentage stock price decline is related to Network Appliance's April-quarter guidance, which is in line with our earnings per share estimate. We think the sell off is overdone and now view shares as fairly valued.

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

Analyst: Amy Glynn, CFA

One day after news of $17/share leveraged buyout offer, Circuit City announced the closing of 19 Superstores, 5 regional offices and one distribution center by month end, plus the sale of a corporate building, as part of ongoing initiatives to improve financial performance. Combined revenues at the 19 stores being closed are about $170 million. Circuit City expects to incur charges of 15 cents per share in the February-quarter. We think the announcement signals Circuit City's confidence in turning around its own operations and now think it less likely that it will accept the buyout offer. We are putting our earnings per share estimates under review.

Nordstrom (JWN): Maintains 4 STARS (buy)

Analyst: Jason Asaeda

Including a 3-cent lease charge, January-quarter earnings per share of $1.00 vs. 74 cents meets our estimate. An expense leverage from 7.2% same-store sales gain and effective cost controls drove a 200 basis points operating margin improvement. With systems investments now enabling Nordstrom to more accurately forecast trends and to better plan inventory and expenses, we look for a strong spring selling season and for the company to grow its customer base and market share in fiscal 2006 (ending January). We are lifting our fiscal 2006 earnings per share estimate by 7 cents to $3.32, and our discounted-cash-flow and p-e-based 12-month target price by $2 to $60.

Mohawk Industries (MHK): Reiterates 4 STARS (buy)

Analyst: Amy Glynn, CFA

Fourth-quarter earnings per share of $1.52, vs. $1.51 is below our $1.54 estimate. Operating margins narrowed by 88 basis points as leverage on the 8% sales growth was offset by higher raw material and energy costs. We think demand remains healthy and price increases implemented in first-quarter should help to partly offset our expectations for continued pricing pressures in 2005. Additionally, we think comparisons will get easier in the second half of the year. Mohawk guides for first-quarter earnings per share of $1.03 to $1.12.

Abercrombie & Fitch (ANF): Maintains 4 STARS (buy)

Analyst: Marilyn Driscoll, CFA

Abercrombie & Fitch beats our January-quarter earnings per share estimate of $1.11, posting $1.15, vs. 97 cents, and operating earnings per share for full fiscal 2005 (ending January) of $2.56 before a 27 cents charge for a lawsuit settlement, vs. $2.07. Fourth-quarter gross margin expanded 240 basis points and selling, general, and administrative expense ratio rose 520 basis points as store selling and service costs rose strategically and A&F funded 150 basis points of incentive bonuses. Hollister stores have passed adult A&F stores in profitability. A&F hired a CFO and CEO for European expansion planned for 2006. Our fiscal 2006 earnings per share estimate stays at $2.95, within $2.80 to $3.00 A&F guidance, and our 12-month target price remains $60.


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