Markets & Finance

S&P Upgrades Red Hat


Red Hat (RHAT): Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analyst: Jonathan Rudy, CFA

February-quarater earnings per share of 6 cents, vs. 3 cents is a penny below our estimate. Revenues of $57.5 million were in line with our expectations. Enterprise subscriptions rose 92%. Red Hat noted strength across all geographies, and operating margin widened to 13% from 6%. Due in part to a higher tax expense than we had expected, we are lowering our fiscal 2006 (ending February) earnings per share estimate to 30 cents from 33 cents. Based on our revised cash flow projections, however, we are raising our target price to $12 from $10. With, in our opinion, solid execution and better future cash flow generation than we had expected, we would hold the shares.

DaimlerChrysler (DCX): Reiterates 3 STARS (hold)

Analyst: Efraim Levy, CFA

Chrysler Group's March sales volume rose 8% year-to-year, while Mercedes-Benz USA sales volume grew 2%. In comparison, volume at Ford declined 2%. We believe Mercedes-Benz sales should benefit from the launch or new products over the next year. Our 35.4 euro target price is equivalent on recent exchange rates to about $45, which remains our target price. Our valuation is based on our discounted-cash-flow analysis, and on economic profit valuation of core automotive business with investments and the financial services unit valued separately. DaimlerChrysler's dividend is yielding 3.4%.

Lockheed Martin (LMT): Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analyst: Robert Friedman, CPA

Separately from the Pentagon's decision to approve the Lockheed Martin's F-22 fighter for full production, we have revised our free cash flow model, upping our fair value appraisal on Lockheed Martin. While we kept our 6% to 7.5% 10-year free cash flow growth rate projections, we boosted our free cash flow starting point from $1.4 billion to $1.7 billion, which leads us to raise our discounted-cash-flow-based 12-month target price to $61 from $50. Although improving financials and cash flow generation make Lockheed Martin a worthwhile holding, in our view, we would not add to positions at current levels.

Intel Corp. (INTC): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Intel states that although it does not agree with the facts underlying the Japan Fair Trade Commission's March 8th allegations, it still plans to comply with the agency's recommendations. The commission had earlier demanded that Intel stop curbing competition in the microprocessor market by pressuring Japanese clients to buy its chips. While we have no way of evaluating the substance of the charges, we believe Intel will need to reword some contracts and/or modify some business practices in order to comply. We are maintaining our target price of $29.

Ford Motor (F): Reiterates 3 STARS (hold)

Analyst: Efraim Levy, CFA

The company's March sales volume fell 1.7%, year-to-year. Cars edged up slightly while trucks declined 2.7%. Retail sales of cars rose a healthy 6%, but lower-margin fleet sales declined. F-Series sales volume advanced 0.6% and the new LR3 at Land Rover drove that brand's sales higher. Meanwhile, Volvo, Jaguar, and Lincoln brands saw volume decline. We continue to be disappointed by weakness in Ford's premium brands, but are encouraged by stability at the important F-Series. Based on historical and peer p-e's, our target price is $12. With shares yielding 3.5%, we would hold Ford.

Kerr-McGee (KMG): Downgrades to 4 STARS (buy) from 5 STARS (strong buy)

Analyst: Charles LaPorta

We believe Kerr-McGee's recent announcement regarding its interest in selling its chemicals business, vigorously endorsed by shareholder activist Carl Icahn, has led to an improved stock performance. However, we are less optimistic about Icahn's proposal for a forward sale of a substantial portion of Kerr-McGee's reserves via a volumetric production payment. And we think the lawsuits and boardroom activity taking place are probably a distraction from needed execution in drilling activity. Even so, we are maintaining our estimates and 12-month target price of $90.

Best Buy (BBY): Reiterates 5 STARS (strong buy)

Analyst: Amy Glynn, CFA

February-quarter operating earnings per share of $1.55, vs. $1.40 beat our estimate by a penny. Shares are down 3% this morning, we think on guidance for the May-quarter and fiscal 2006 (ending February) earnings per share at 27 cents to 32 cents and $2.95 to $.3.10, below S&P and Street estimates, even after adjusting for 5 cents and 23 cents in stock-based compensation expenses and accounting adjustments which we had not modeled. Projected fiscal 2006 11% revenue growth is in line with our model, and we think the projected earnings per share shortfall reflects higher costs from services business and store conversions.


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