Markets & Finance

S&P Keeps Freddie Mac at Sell


Freddie Mac (FRE): Maintains 2 STARS (sell)

Analyst: Jason Seo, CFA, Mark Hebeka,CFA

Freddie Mac released its much-anticipated 2004 earnings per share of $3.78, well below our estimate mainly due to $4.5 billion in derivative losses. We are encouraged by core business strength and market share gains relative to Fannie Mae (FNM), but we are concerned about Freddie's ability to manage its derivatives going forward. While we believe Freddie has most of its accounting issues under control, we are still uneasy about what we see as a difficult political environment. Freddie Mac sees first half 2005 financial results being released at the end of August 2005. Our 12-month target price remains $57.

Cisco Systems (CSCO): Reiterates 5 STARS (strong buy)

Analyst: Ari Bensinger

Cisco terminated its poison pill antitakeover defense, which had been set to expire in June 2008. Adopted in 1998, the defense was triggered if a party acquired 15% of Cisco's stock. We view the cancellation as positive for corporate governance, and note that it was originally put in place by the board of directors and not by a shareholder vote. While the size of the company ($115 billion market capitalization) makes an acquisition extremely unlikely, the termination demonstrates to us that Cisco is aligning its corporate governance policies to the best interests of shareholders.

Continental Airlines (CAL): Reiterates 5 STARS (strong buy)

Analyst: James Corridore

Unions for Continental's pilots and mechanics ratified labor cost cuts, while flight attendants rejected their contract. Despite earlier worries that a rejection by any union would torpedo all contracts, Continental says that the unions with ratified contracts have agreed to implement them anyway, saving Continental $418 million annually, compared with the $500 million total Continental was seeking. We see this as a big win for Continental, and see eventual cost cuts from flight attendants as inevitable. Continental now has a lower cost structure in what we see as an improving revenue environment. Our target price is $14.

UTStarcom (UTSI): Maintains 3 STARS (hold)

Analyst: Aryeh Bensinger

UTStarcom delays its 10-K filing for 2004 and its amended 10-K for 2003 beyond the Mar. 31 extended due date, citing delays for required review procedures and Sarbanes Oxley assessment. It now anticipates filing the 10-Ks by Apr. 15. We note that the delay triggers a technical default in UTStarcom's $400 million convertible notes due 2008 and increases the risk of share delisting by the NASDAQ market. We are lowering our 12-month target price to $12 from $14, or 12 times our 2005 earnings per share estimate of $1.00, a steep discount to peers, based on our view of filing issue risks.


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