Markets & Finance

S&P Downgrades Sony to Strong Sell


Sony Corp. (SNE): Downgrades to 1 STAR (strong sell) from 3 STARS (hold)

Analyst: John Yang

Sony posted a March-quarter loss of 56 cents per share, vs. a 39-cent loss, wider than our estimate of a 37-cent loss on weaker operating margin in the electronics segment than we expected. Looking ahead, we expect continued price pressure in digital consumer products to continue to squeeze margins in the electronics segment, which we believe will likely outweigh additional restructuring savings of about $680 million expected in fiscal 2006 (ending March). We are slightly decreasing our fiscal 2006 earnings per share estimate to 64 cents. Based on blended discounted-cash-flow and relative valuation, we are lowering our target price by $6 to $33.

Molson Coors (TAP): Downgrades to 2 STARS (sell) from 3 STARS (hold)

Analyst: Anishka Clarke

Molson Coors posted a first-quarter operating loss of 8 cents per share, vs. 13 cents EPS, below our 36-cent EPS estimate. Volume declines in all markets and higher commodity and packaging costs hurt profitability. We see further cost pressures for the rest of 2005, and are even less

confident that the company can effectively compete in the U.S. market, given our view of weak beer fundamentals and stiff competition from spirits and wines. We see continued weakness in Canada, but we expect some easing in the U.K. in 2005. We are reducing our 2005 EPS estimate to $3.72

from $5.61. We are lowering our target price to $60 from $75.

Exxon Mobil (XOM): Reiterates 5 STARS (strong buy)

Analyst: Tina Vital

The oil giant posted first-quarter operating EPS of $1.15

before a 7-cent gain on the sale of of its interests in Chinese energy outfit Sinopec, vs. 83 cents one year ago. Results were 5 cents below our estimate on lower-than-expected international marketing margins. As expected, barrel-of-oil equivalent (boe) production dropped 4.7%; we project flat growth in 2005 before ramping up in 2006. As the world's largest publicly traded oil company, we expect Exxon Mobil's upstream to benefit from high oil prices in 2005 and 2006, and its heavy sour (high sulfur content) crude refineries to benefit from significant crude pricing discounts. A blend of our valuation metrics leads us to keep our target price of $73.

Procter & Gamble (PG): Reiterates 5 STARS (strong buy)

Analyst: Howard Choe

March-quarter earnings per share 63 cents, vs. 55 cents is a penny higher than our view, and 2 cents ahead of the Street. Key health, baby and family care segments, and developing markets drove better-than-expected volume. Operating profit rose 17%, as scale benefits offset higher raw material costs. Given the upside and strong volume outlook, we are raising our fiscal 2005 (ending June) earnings per share to $2.66 from $2.64 and fiscal 2006's to $2.96 from $2.93. Given our view of Proctor & Gamble's strong top-line momentum and large presence in attractive categories and markets, we see Proctor & Gamble as undervalued trading at a 7% discount to peers on calendar 2005 p-e.

Sirius Satellite Radio (SIRI): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

First-quarter per-share loss of 15 cents, vs. a 12-cent loss is 3 cents wider than our estimate. But 305,437 net adds on solid growth at original equipment manufacturer and retail, with record-low 1.3% churn, significantly exceeded our forecast. Results were hurt by higher programming and customer service costs, but aided by better-than-expected declines in subscriber acquisition costs to $190. We think business model supports fully funded operations through likely free cash flow breakeven by 2007. Sirius ups its 2005 guidance for net adds by 200,000 to 1.6 million, with subscriber acquisition costs down to $145. We are reviewing our models.

Ask Jeeves (ASKJ): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Excluding certain acquisition-related costs and one-time items, Ask Jeeves posted first-quarter earnings per share of 37 cents, vs. 23 cents, 2 cents better than our estimate. GAAP earnings per share was 26 cents, vs. 23 cents. Revenues rose 142%, reflecting the May 2004 acquisition of Interactive Search Holdings. Google accounted for 74% of revenues. We expect Ask Jeeves's proposed acquisition by IAC/InterActiveCorp to be completed by September 2005, pending approvals. Our $29 target price is based on our $23 target for IACI multiplied by the deal's proposed exchange ratio of 1.2668 IAC shares for each Ask Jeeves share.

Chiron Corp. (CHIR): Maintains 3 STARS (hold)

Analyst: Frank DiLorenzo, CFA

First-quarter operating earnings per share of 4 cents, vs. 5 cents is 22 cents below our estimate on costs from Fluvirin suspension. For 2005 through 2006, Chrion says it could produce 25 million to 30 million doses. We assume clearance by the FDA for the flu season and are keeping our forecast at 25 million doses. Blood testing-related revenue of $134 million was $19 million above our view and vaccine sales of $87 million were $3 million below, and biopharmaceutical-related sales of $145 million were $2 million below. Our 2005 earnings per share estimate falls to $1.51 from $1.71. We see base value to Chiron's business and our target price remains $43, though we note potential downside if flu shipments are delayed.

Regal Entertainment (RGC): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

First-quarter operating earnings per share of 9 cents, vs. 12 cents is 11 cents shy of our estimate, including "other" theater and depreciation and amortization costs. We also underestimated comparable sales with last year's showing of "Passion". Regal announces a deal to buy Eastern Federal circuit in Florida and Carolinas which, combined with R/C deal, would add 29 theaters with 314 screens. At 6.7 times trailing EBITDA, price is consistent with recent transactions, in our view. From second-quarter, Regal will reflect CineMedia business as equity investment due to joint venture with AMC. Second-quarter box office seems modest, but summer slate looks solid to us.


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