Markets & Finance

S&P Keeps Buy on AIG


American International Group (AIG): Maintains 4 STARS (buy)

Analyst: Catherine Seifert

Former chairman and CEO Greenberg announces his intention of invoking his fifth amendment right not to answer questions from the SEC and the New York Attorney General related to their probe of certain transactions, alleged to be questionable, undertaken by AIG. Although our outlook remains tempered by the uncertainty related to this investigation, we note that a $3 billion to $4 billion writedown to Sept. 30, 2004 equity of $78.9 billion ($30 per share) equals a haircut to book value of between $1.14 to $1.50 per share. Our 12-month target price of $62 assumes no material premium to peers.

Qualcomm (QCOM): Reiterates 5 STARS (strong buy)

Analyst: Kenneth Leon, CPA

NTT DoCoMo, the world's leading wireless carrier, announces WCDMA interoperability works with its second-generation freedom of mobile multimedia access (FOMA) network. This means NTT DoCoMo can migrate its network to the third-generation platform, using Qualcomm's intellectual property within its chipset and software solution. With the rest of the world moving to CDMA-based technology from Qualcomm, the breakthrough with NTT DoCoMo means subscribers can roam in and out of Japan's largest wireless network. We see Qualcomm as a global provider with unique pricing power, 20% sales growth, near 35% net margins, and $8 billion in cash with no debt.

Genentech (DNA): Reiterates 5 STARS (strong buy)

Analyst: Frank DiLorenzo, CFA

First-quarter pro forma earnings per share of 29 cents, vs. 19 cents is 4 cents above our estimate. U.S. Avastin sales of $203 million are $12 million below our view, total Rituxan sales of $474 million are $8 million above, and Tarceva sales of $48 million are $3 million below our estimates. With the move into lung cancer, and possibly kidney cancer, we see a strong long-term upside to U.S. Avastin sales. We are cutting our 2005 Avastin sales forecast to $903 million from $943 million, but our 2006 estimate stays $1.5 billion. We are raising our 2005 earnings per share estimate to $1.13 from $1.08 on stronger-than-expected royalties and sales to collaborators. On net present value analysis and our target price remains $71.

BMC Software (BMC): Maintains 3 STARS (hold)

Analyst: Zaineb Bokhari

Following BMC's announcement of preliminary March-quarter results, we are lowering our fiscal 2005 (ending March) estimates for revenue to $1.46 billion from $1.49 billion and for operating earnings per share to 62 cents from 72 cents. Our fiscal 2006 revenue growth projection also falls to 3% from 6%. However, after factoring in expected cost savings from headcount reductions, we are raising our fiscal 2006 earnings per share estimate to 96 cents from 83 cents. BMC trades at a 20% discount to peers, based on p-e. In our view this discount reflects BMC's poor recent execution. Our target price, based on relative p-e and p-e-to-growth analyses, falls to $16 from $17.

Advanced Micro Devices (AMD): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Ahead of Advanced Micro Devices's (AMD) first-quarter results, we see earnings per share of 2 cents on a 5% sequential decline in sales. We expect overall company profitability to be restricted by continued price pressure in AMD's flash memory business. Our relative p-e analysis suggests that shares are trading at a rich premium to chipmaker peers. However, we view AMD as fairly valued on the basis of our price-to-sales model, which values the stock at a small discount to its historical average multiple. We think such a discount multiple is warranted, given our view of above-average near-term macro and competitive risks.

Boeing (BA): Reiterates 3 STARS (hold)

Analyst: Robert Friedman, CPA

The Wall Street Journal, in an unconfirmed report, says that Northwest Airlines may buy 10 to 12 of Boeing's next-generation 787 long-range passenger jets. The possible purchase bolsters our belief that the innovative plane could become almost as big a seller as Boeing's workhorse 737. However, we surmise that the combination of mature markets and a very tough Airbus competitor may prevent Boeing from posting outsized margins on the plane. Consequently, we are keeping our 10-year free cash flow growth rate projection of 6.5%, and advise investors to hold positions at current share price levels.

Computer Associates (CA): Maintains 3 STARS (hold)

Analyst: Zaineb Bokhari

Following preliminary March-quarter results we found disappointing from competitor BMC Software, Computer Associates reaffirms its guidance for its March-quarter. The company also discloses plans to repatriate about $500 million in cash under the American Jobs Creation Act of 2004. As a result, it expects to take a related tax charge of 6 cents per share in the March-quarter. We are maintaining our fiscal 2005 (ending March) projections for revenue of approximately $3.5 billion, and operating earnings per share of 82 cents before special items. We expect the company to use the repatriated cash to pay down debt or make strategic acquisitions.

Abbott Laboratories (ABT): Reiterates 4 STARS (buy)

Analyst: Frank DiLorenzo, CFA

First-quarter pro forma earnings per share of 58 cents, vs. 53 cents is a penny below our estimate. Global sales of Humira were $282 million, $20 million below our view. We expect the second half 2005 Humira approval in psoriatic arthritis. U.S. pharma sales of $1.87 billion, diagnostic sales of $887 million, and international sales of $1.75B were in line with our forecasts. Ross sales of $677 million were below our $744 million projection on weak pediatric sales. We are trimming our 2005 earnings per share estimate to $2.51 from $2.54, 2006's to $2.80 from $2.85. Assumptions include successful defense of Biaxin XL from generics. Our 12-month discounted-cash-flow-based target price remains $54.


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