Markets & Finance

S&P Upgrades Cree to Buy


Cree (CREE): Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: Mark Basham

With Cree shares down 47% year-to-date, they have significantly underperformed not only the S&P 500, but the laggard tech sector as well. We attribute this to a lowering of expectations at the beginning of the year due to transition costs of production onto 3-inch wafers, as well as concern about price erosion for mid-brightness products for use in backlighting. We believe 3-inch transition is on track and have high expectations for Cree's high brightness and power products. We are raising our 12-month target price by $2 to $26 on our view of growth in fiscal 2006 (ending June).

ChevronTexaco (CVX): Maintains 3 STARS (hold)

Analyst: Charles LaPorta

ChevronTexaco's announces intentions to purchase Unocal in a cash and stock deal valued at $18 billion, or $62 per share at Friday's closing prices. The acquisition, pending necessary approvals, will combine complimentary assets in the Asia-Pac region, the Caspian region and the deepwater Gulf of Mexico. The company expects the proposed deal to be accretive to 2006 cash flow, largely neutral to 2006 earnings per share assuming share repurchases, and slightly dilutive to return on capital expenditures. Our $65 12-month target price is based on a peer enterprise value multiple of 6.5 times cash flow.

Fannie Mae (FNM): Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analyst: Jason Seo, CFA

Our upgrade is based on valuation. The shares have dropped on what we believe are fears regarding OFHEO's investigation into Fannie Mae's accounting of the trusts it sets up to issue Mortgage Backed Securities, first reported by the Wall Street Journal. Should Fannie Mae be forced to report these trusts (originally recorded as off-balance sheet items) on its books, we think it will face additional hurdles in meeting its minimum capital requirements set by OFHEO. Despite the uncertain regulatory outlook, we retain our target price of $53 on our view that Fannie Mae's long-term business outlook remains fundamentally sound.

Lions Gate Entertainment (LGF): Maintains 4 STARS (buy)

Analyst: William Mack, CFA

This morning, Lions Gate Entertainment announced that it has requested access to due diligence information from HIT Entertainment PLC, a London-based children's entertainment company. We think this is the first step in a potential tender offer by Lions Gate Entertainment for HIT, whose board recently recommended it accept a "friendly" offer from another party. At this time, we are making no change in our recommendation or our earnings estimates for Lions Gate Entertainment. However, we note that, based on enterprise value and including HIT's 10% price jump today, Lions Gate Entertainment, at about $1.5 billion, is almost twice HIT's size.

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

Analyst: James Corridore

Continental Airlines estimates that March revenue per available seat mile rose between 4% to 5%, indicative to us that the revenue environment is improving. The company also said March traffic rose 15% on a 7% rise in capacity, driving a 5.5 percentage point increase in passenger load factor. With airlines pushing through another fare increase on Friday, we think unit revenues for April are likely to be good. With last week's labor cost cuts and, in our view, improving revenues, we think Continental will cut its operating loss this year and return to profitability next year. Our 12-month target price is $14.


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