Markets & Finance

Wal-Mart, Novellus Raised to Strong Buy


Wal-Mart (WMT): Upgrades to 5 STARS (strong buy) from 4 STARS (buy)

Analyst: John Agnese

Wal-Mart shares are trading significantly below our 12-month target price of $62, based on discounted-cash-flow and p-e analyses. The company posts January-quarter earnings per share of 75 vs. 63, in line with our expectations. Results reflected 1.5% rise in comp-store sales, benefits from global sourcing and fewer markdowns, partly offset by increased store labor and utility costs. Wal-Mart sees fiscal 06 (Jan.) earnings per share of $2.70-$2.74 as the primary customer demographic benefits from stabilization of oil prices and economic improvement. We are raising our fiscal 06 earnings per share estimate a penny to $2.72, at midpoint of guidance range.

Novellus (NVLS): Upgrades to 5 STARS (strong buy) from 3 STARS (hold)

Analyst: Colin McArdle

Our upgrade is based on our view of the company's technology leadership and global presence. We think the fundamentals

for semiconductor equipment companies will improve in second half of 2005 as semiconductor inventories are worked down. In our view, chip makers will need to spend much more on equipment that supports 300mm wafer sizes and sub 130nm line widths and think Novellus will benefit as a market share leader in several front-end processes. We believe the stock

should trade in line with peers at 4.0 times our fiscal 2005 sales projection, and are raising our 12-month target price to $36 from $27.

Hewlett-Packard (HPQ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Non-GAAP January-quarter earnings per share of 37 cents vs. 35 cents is 3 cents above our estimate. While revenues beat our projection despite weak printer sales, we were disappointed by gross margin though impact was offset by SG&A cuts. Enterprise unit posted growth in services & Proliant servers, but weak margins continue to reflect H-P's poor competitive positioning, in our view. We are raising our fiscal 2005 (ending October) estimate by 3 cents, to $1.53, but note that H-P sees April-quarter earnings per share below our model. While we are concerned about sales productivity during CEO search, we would hold H-P at price/sales below peer average.

RadioShack (RSH): Reiterates 3 STARS (hold)

Analyst: Amy Glynn-CFA

Shares are down 7% at the open today following fourth-quarter earnings per share release and lowered guidance for 2005. Fourth-quarter earnings per share of 81 cents, vs. 77 cents missed our 84 cents estimate and the Street's 83 cents. RadioShack also trimmed 2005 guidance by 7 cnets, and now expects earnings per share of $2.34 to $2.40, for growth of about 14% from year ago. But RadioShack also expects its first quarter to be flat to down 5% from a year ago. We calculate that the company would need to generate average earnings per share growth of 19% in rest of 2005 to reach its full year target.

Monsanto (MON): Reiterates 1 STAR (strong sell)

Analyst: Andrew West, CFA

Monsanto announced a definitive agreement to acquire Emergent Genetics, a cotton seed company with annual sales of $69 million, for $300 million. The company reduces its fiscal 2005 (ending August) GAAP earnings per share outlook to 71 cents to 93 cents from 86 cents to $1.06, but expects pro forma earnings per share at the "upper end" of its $1.85 to $2.00 guidance, and sees cash from operations of $1,200 million and negative free cash flow of $900 million. We see the proposed acquisition as having little effect on near-term operating earnings that we estimate at $1.97, and continue to have concerns about Monsanto's quality of earnings and risk profile, given multiple special charges.


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