Markets & Finance

S&P Upgrades Adobe, Macromedia to Buy


Adobe Systems (ADBE): Upgrades to 4 STARS (buy) from 3 STARS (hold)

Macromedia (MACR): Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: Scott Kessler

Adobe agreed to acquire Macromedia in all-stock transaction valued at $3.4 billion. The exchange ratio would be 0.69 Adobe shares per Macromedia share, a 25% premium to Macromedia's closing price Friday. Although we think the price for Macromedia at 44 times our calendar year 2005 earnings per share estimate is somewhat rich, we think the proposed acquisition is strategically compelling and would enhance Adobe's technology, products, market share, and eventually, its financial performance. We foresee a fall 2005 closing, pending necessary approvals. We think today's sell-off in Adobe offers an attractive opportunity to purchase the shares. Based on our 12-month target price for Adobe of $68, we are raising our target price for Macromedia to $47 from $32.

Electronics Boutique (ELBO): Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analyst: Markos Kaminis

Electronics Boutique agrees to be acquired by GameStop Corp., subject to necessary approvals, with its holders to receive $38.15 in cash and 0.78795 GameStop shares per Electronics Boutique share. Based on Friday's close, before impact of the news, we calculate the value of the deal to Electronics Boutique shareholders at about $55.18 a share. We believe the deal price benefited from the high concentration of Electronics Boutique share ownership. We are concerned about store overlap and potential for store closings, but with 70% of the deal cash-based, we recommend holding the Electronics Boutique shares.

Bank Of America (BAC): Reiterates 5 STARS (strong buy)

Analyst: Evan Momios, CFA

Bank of America posted first-quarter earnings per share of $1.14, vs. 91 cents, 17 cents above our and the Street's consensus estimates. Securities gains and trading account revenues that were higher than we had projected, combined with lower-than-anticipated loan loss provisions accounted for most of the earnings per share surprise. The net interest margin narrowed modestly from fourth-quarter, non-performers declined and expenses remained under control. We are raising our 2005 earnings per share estimate by 12 cents to $4.15, and keeping 2006's at $4.50. Our 12-month target price remains $54.

Eli Lilly (LLY): Reiterates 3 STARS (hold)

Analyst: Herman Saftlas

Lilly posted first-quarter earnings per share up 10% to 68 cents, 2 cents above our estimate. But sales growth of 4% was due entirely to higher prices and positive foreign exchange. Impacted by wholesaler destocking, U.S. drug sales fell 3%, with Zyprexa down 17%, Strattera down 20%, and Gemzar down 1%. Lilly also cuts second-quarter earnings per share guidance to 65 cents to 68 cents to reflect inventory workdowns. However, its new drugs, such as Cymbalta, Alimta and Cialis, were strong. We like what we see as a robust pipeline, but remain concerned over eroding U.S. Zyprexa sales. Our target price remains $60, based on our forward p-e and discounted-cash-flow assumptions.

GameStop (GME.B): Maintains 4 STARS (buy)

Analyst: Amy Glynn, CFA

GameStop shares are up about 12% after the company agrees to acquire Electronic Boutique, subject to approvals, for $1.44 billion: $38.15 in cash and 0.78795 GameStop Class A shares per Electronic Boutique share. We expect planned deal to be significantly accretive in fiscal 2006 (ending January) and beyond, with meaningful pretax synergies expected. As this is a sizeable acquisition, we are concerned about potential acquisition risk, but we see benefits from combined strength.

Martha Stewart Living (MSO): Reiterates 2 STARS (sell)

Analyst: Gary McDaniel

Martha Stewart Living announced a four-year pact with Sirius to create a 24-hour women's network. Terms were not disclosed, but we do not expect this deal to add significant value to Martha Stewart Living. Though growing rapidly, Sirius offers Martha Stewart a subscriber base of just 1.2 million. Also, we do not believe Martha Stewart's content is a good fit for radio, given the visual, hands-on nature of cooking, decorating, and arts and crafts. According to representatives of XM Satellite Radio, that company had spoken with Martha Stewart Living about a deal, but declined to create a channel, believing its potential was limited.

SunTrust Banks (STI): Reiterates 3 STARS (hold)

Analyst: Mark Hebeka, CFA

SunTrust posted first-quarter earnings per share of $1.36, vs. $1.26, 5 cents above our estimate. The timing of merger-related charges, along with increased asset quality helped SunTrust achieve better results than we expected. SunTrust says the integration of National Commerce Financial is proceeding as planned and cost savings are expected to be fully realized in 2006. While we are encouraged by SunTrust's expense control and look for more in the future, we are concerned about slowing deposit growth and decreased fee income. Our 2005 and 2006 earnings per share estimates remain at $5.51 and $6.09, and our 12-month target price stays at $75.

Corning (GLW): Reiterates 3 STARS (hold)

Analyst: Ari Bensinger

Corning now sees first-quarter sales of $1.04 billion to $1.05 billion and earnings per share of 16 cents to 17 cents, above its prior $980 million to $1.03 billion and 11 cents to 13 cents guidance. The company attributes the upside to strong equity earnings at Dow Corning, higher demand for hardware and equipment, and a lower tax rate than expected. We are raising our 2005 earnings per share estimate to 62 cents from 54 cents, believing that Corning is benefiting from accelerated telecom deployments of fiber-to-the-home. However, we are concerned that falling prices of liquid crystal displays will hamper Corning's long-term growth potential. Our 12-month target price remains $12.


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