Markets & Finance

S&P: Still Hold Pfizer


Pfizer (PFE): Reiterates 3 STARS (hold)

Analyst: Herman Saftlas

Pfizer forecasts 2005 earnings per share of $2.00, compared with our estimate of $2.10 and 2004's $2.12. Pfizer is spending $5 billion to $6 billion to implement an expense reduction program expected to save up to $4 billion annually by 2008. Boosted by cost cuts, Pfizer sees double-digit earnings per sahre growth in 2006 and 2007. We are raising our 12-month target price by $2, to $29, based on our revised forward P/E and discounted cash flow assumptions. But we maintain our hold recommendation on Pfizer, given our projections for only modest top-line growth over next few years, and what we see as pipeline uncertainties.

Morgan Stanley (MWD): Reiterates 3 STARS (hold)

Analyst: Robert Hansen, CFA

Morgan Stanley says it will pursue a spinoff of Discover Financial Services, its credit card subsidiary. We agree that a tax-free spinoff should maximize shareholder value, but think an increase in the number of directors on the board, also announced, could raise governance issues. We are leaving our fiscal 2005 (ending November) earnings per share estimate at $4.75, and our 12-month target price at $58, or about 12 times our fiscal 2005 earnings per share estimate, below peers. We would not add to positions, since we think shareholder dissent, executive departures, and management control issues will hurt employee morale and client relationships.

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

Analyst: Efraim Levy, CFA

According to the Detroit News, Ford is seeking to reduce its salaried employee headcount by 1,000, either through voluntary buyouts or layoffs. We view this as a first necessary step for the company to reduce its costs amid falling marketshare, higher commodity and healthcare costs, and intense competitive pressure. We think further headcount reduction and other steps will be necessary to improve profitability. Based on historical and peer p-e comparisons we have a 12-month target price of $12. With a dividend yielding 3.6%, we view the shares as a hold for total potential return.

Interpublic Group (IPG): Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analyst: Jonathan Peters, CFA

Interpublic announces preliminary, unaudited 2004 revenue of about $6.2 billion, up 5.8%. Because of unresolved Sarbanes Oxley-related material control weaknesses, earnings per share was not provided, though Interpublic believes prior year restatements will not be material. Interpublic also obtained waivers from creditors that allow SEC filing obligations to be fulfilled later in the year without default. While we still believe Interpublic faces a long credibility recovery period, we think its near-term risk profile has improved. We are raising our 12-month target price to $14 from $11, based on revised discounted-cash-flow analysis.

RSA Security (RSAS): Downgrades to 4 STARS (buy) from 5 STARS (strong buy)

Analyst: Jonathan Rudy, CFA

RSAS sees first-quarter revenues of $74 to $76 million, below our estimate of $81 million, and earnings per share of 8 cents to 10 cents, below our estimate of 14 cents. The company cites longer sales cycles during March, notably in the Americas and European regions. We are lowering our 2005 and 2006 earnings per share estimates to 56 cents and 68 cents, from 68 cents and 82 cents. However, based on RSA's more than $4.00 per share in cash/investments, no debt, and trading at a notable discount to peers on an enterprise value/sales basis, we continue to view its shares as attractive, though we are lowering our 12-month target price to $16 from $20.

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

Analyst: Megan Graham-Hackett

Hewlett-Packard held a meeting on Apr. 4 to discuss its personal systems and printing groups' strategy. The goal for its imaging & printing group operating margin remains 13% to 15%, but we believe this level is being pressured as HP drives share gains. Hewlett Packard cites supply chain and warranty cost efforts as ways to drive sustainable profit improvement in PCs and still sees digital photo & entertainment as vehicles to drive profitable growth, but we did not hear any new details about better leveraging this strategy. Trading at price per share of less than 1 time, below peer avgerage, we view Hewlett Packard as worth holding.

Altiris (ATRS): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Zaineb Bokhari

Altiris expected first-quarter earnings per share of 17 cents to 18 cents, below prior guidance of 20 cents to 22 cents chiefly on higher legal and compliance expenses. While Altiris sees March-quarter revenues of $46 million, in line with earlier guidance, we estimate that recent acquisitions contributed about $1 million. We are lowering our 2005 earnings per share estimate by 4 cents to $1.03, and our 12-month target price to $23 from $29 using a p-e of about 22 times on our revised earnings per share estimate. This 10% discount to peers is warranted, in our opinion, by our revised outlook for limited operating margin expansion and by higher future volumes of acquisitions that we project.


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