Markets & Finance

S&P: Still Hold Apple amid iPod Moves


Apple Computer (AAPL): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Apple says it cut the iPod mini price by 20%, making it a more competitive product, in our view; introduced several new iPods with more storage capacity; and dramatically improved battery life, long a criticism of the device. While it is difficult to quantify the benefit to sales, we are raising our fiscal 2005 (ending September) earnings per share estimate by 5 cents to $2.05, and our target price to $92 from $80 and 2.5 times our new fiscal 2006 sales estimate. Though shares are above peers on enterprise value-to-sales basis, with Apple's opportunity to leverage iPod success into new markets and a strong cash position, we would hold the shares.

Exxon Mobil (XOM): Reiterates 4 STARS (buy)

Analyst: Tina Vital

Our outlook for heavy sour crude refiners is positive, as we expect margins and discounts for lower quality crude oil feedstocks to remain strong in 2005. We see heightened competition for global fuel supplies this year, based on tightened fuel specifications for sulfur amid planned refinery maintenance and increased demand. As a result, we are raising our 12-month target price for XOM, the world's largest refiner (about 85% of its crude feedstocks are sour), to $66 from $57, to align its enterprise value-to-trailing EBITDA with its peer independent refiners.

Procter & Gamble (PG): Reiterates 5 STARS (strong buy)

Analyst: Howard Choe

Proctor & Gamble and Gillette's presentation today at the CAGNY conference reaffirmed our favorable view of their proposed merger, pending approvals. Aside from expected scale benefits, we think the most salient points made were: the potential to accelerate growth of developing markets, complementary cultures that emphasize innovation, and trade-up strategies that foster higher margin consumption. Given numerous merger benefits we see, we have confidence in Proctor & Gamble's goals of achieving $1 billion to $1.2 billion in cost synergies by fiscal 2008 (ending June) and peer-leading operating margins of 24% to 25% by 2010.

ConocoPhillips (COP): Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: Tina Vital

Our outlook for heavy sour crude refiners is positive, as we expect margins and discounts for lower quality oil feedstocks to remain strong over the next 12 months. Reflecting our expectations for heightened competition for global fuel supplies this year, on tightened fuel specifications for sulfur amid planned refinery maintainance and increased demand, we are raising our 12-month target price for ConocoPhillips, the largest refiner in the U.S., to $120 from $93, to align its enterprise value-to-trailing EBITDA with its peer independent U.S. refiners.

Intel (INTC): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Intel agrees to acquire Israel-based Oplus Technologies, a provider of chips and software for digital televisions and digital displays. Financial terms for the deal, which is subject to necessary approvals, were not disclosed. We have a positive view of the deal, which we believe would give Intel key display processing and enhancement technology expertise that it currently lacks. We expect the company to pursue similar small, targeted acquisitions over the next 12 months, in order to gain a larger foothold in its non-traditional markets. Our 12-month target price remains $26.

Fannie Mae (FNM): Maintains 3 STARS (hold)

Analyst: Mark Hebeka, CFA

With Fannie Mae's announcement of yet more potential accounting issues, and the deadline extension to meet its capital requirement, we continue to be very cautious on the company's outlook. In order to meet the capital requirement, this government-sponsored enterprise plans to keep its recently halved dividend and to cut advertising and lobbying expenses. While we believe cost containment is a positive, we disagree with planned decrease in lobbying costs during such a critical time period when we see political risk at an historic high. We are keeping our 12-month target price of $57.

International Business Machines (IBM): Reiterates 5 STARS (strong buy)

Analyst: Megan Graham-Hackett

Today's Wall Street Journal reports IBM's services contracts are shifting in size and duration to smaller scope projects. This is a trend that the company has highlighted for more than six months now, and it has been echoed by other services firms. We believe the benefits include more manageable projects, and avoidance of sizeable upfront costs of longer outsourcing contracts. We see IBM's global services gross margins beginning to benefit from this trend later this year. Our 2005 earnings per share estimate stays $5.70. We view IBM as attractive, with shares trading below peer average on a price/sales basis.

Limited Brands (LTD): Maintains 3 STARS (hold)

Analyst: Marie Driscoll, CFA

Limited Brands reports 95 cents, vs. 74 cents fourth-quarter operating earnings per share, compared with our $1.05 estimate (on 16% fewer shares). Consolidated same-store sales growth of 2% was driven by a 12% rise at Bath & Body Works and 5% at Victoria's Secret, partially offset by a 14% decline for apparel. We expect exciting new product introductions at Bath & Body, and look for accelerated growth at Victoria's with the development of Pink, although we believe apparel will take time to turn. We see $1.65 fiscal 2006 (ending January) earnings per share. Our 12-month target price is $27, based on about 10% discount to peer group forward multiple of 18 times.


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