Markets & Finance

S&P Keeps Strong Buy on Cisco


Cisco Systems (CSCO): Reiterates 5 STARS (strong buy)

Analyst: Ari Bensinger

Cisco agrees to acquire Sipura Technology, a provider of voice over IP (VoIP) consumer premise equipment, for $68 million. The deal, subject to necessary approvals, is expected to close during Cisco's July-quarter. We believe the pending acquisition makes strategic sense, as Cisco's Linksys division already licenses Sipura technology in its analog telephone adapter and wireless router products. Sipura also has strong relationships with several top-tier VoIP providers. We see the proposed acquisition enhancing Cisco's market position in the rapidly expanding consumer VoIP arena.

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

Analyst: Frank DiLorenzo, CFA

Two Phase III trials of Herceptin plus chemo after surgery in women with early breast cancer have been stopped early on positive survival data. According to National Cancer Institute, Herceptin provided 52% decrease in disease recurrence versus chemo alone. We think Herceptin could reach peak sales of over $1 billion annually by decade's end, and see growing royalties from sales outside U.S. We remain positive on Avastin and Rituxan. Our 2005 earnings per share estimate remains $1.13, but we are increasing 2006's to $1.60 from $1.53. On revised net present value analysis, we are raising our target price by $10 to $90.

PepsiAmericas (PAS): Maintains 3 STARS (hold)

Analyst: Richard Joy

First-quarter earnings per share before special item is 16 cents, vs. 14 cents, 2 cents above our estimate. Worldwide sales rose 12%, reflecting the acquisition of bottler Central Investment, 5% higher selling prices, and volume gains. Gross margin widened as strong top-line growth mitigated input cost inflation. We believe volume trends will continue to improve and cost inflation will moderate, and are raising our 2005 earnings per share estimate by 2 cents to $1.37. We view PepsiAmericas as worth holding, owing to our view of long-term growth potential and margin improvement. After strong 2005 start, we are raising our target price $2 to $25.

Nortel Networks (NT): Maintains 3 STARS (hold)

Analyst: Kenneth Leon, CPA

We think acquisition of PEC Solutions by Nortel for about $448 million, pending approvals, should enhance Nortel's competitive position for potential contracts with the U.S. government. PECS's professional services, with Nortel's networking solutions, should allow Nortel to compete against market leaders Lucent and Cisco Systems. Nortel expects the proposed deal to be earnings per share neutral in 2005 and accretive thereafter. We note that Nortel has not given 2005 earnings per share guidance or released its full-year 2004 results. Despite shares priced below peers, we would not add to positions.

Altera (ALTR): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Altera posted first-quarter earnings per share of 17 cents, vs. 15 cents, 2 cents above our estimate. Sales rose 9% from a year ago and 10% sequentially, on strong growth for new products. Gross margin of 68.3% was 70 basis points below our forecast, but operating expenses were less than we had expected. On lower assumptions for operating expense levels, we are raising our second-quarter earnings per share estimate to 17 cents, from 15 cents and our full 2005 estimate to 73 cents from 67 cents. However, we are keeping our 12-month target price for these high-beta shares at $23, based on our revised p-e and price-to-sales analyses.


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