Markets & Finance

S&P Keeps Strong Sell on Clear Channel


Clear Channel Communications (CC): Maintains 1 STARS (strong sell)

Analyst: Tuna Amobi, CPA, CFA

Clear Channel unveiled key initiatives to unlock and return value to its shareholders. Pending approval, it will

float 10% of its outdoor division in an IPO, spin off 100% of its entertainment unit, and pay a $3 special dividend. Clear Channel also announced a 50% hike in its quarterly payout. The shares moved higher Friday on these bold moves, after similar moves by peer Viacom (VIA.B) to split its businesses. However, the company's first-quarter release confirmed our concerns about its Less-Is-More radio initiative, as radio revenues fell 7% and first-quarter EPS of 9 cents, vs. 16 cents (as adjusted) one year earlier, was well shy of our estimate.

After the first-quarter call, we are lukewarm on Clear Channel's pending strategic and potential shareholder-friendly initiatives announced today, including plans to separate outdoor and entertainment businesses from radio, and to set $3 special dividend while immediately boosting regular dividend payout by 50%. We think these surprising moves, plus likely more stock buyback activity, could provide limited near-term support for shares, as Clear Channel's core underlying fundamentals remain weak. We are lowering our 2005 earnings per share estimate by 28 cents to $1.20. We maintain our target price of $28, on sum-of-the-parts discounted-cash-flow.

Sun Microsystems (SUNW): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Shares are up today after an unconfirmed report in BusinessWeek that CEO McNealy has had talks with SilverLake Partners on taking the company private. The news is not surprising to us, since McNealy had voiced interest in such a move at Sun Microsystems's February analyst meeting. Based on reports, intent would be to bring Sun Microsystems public again after divesting certain assets and reinvesting in core hardware, software and services. Given its challenging market position and sustained losses, we think such a move could take time. Still, with $7.4 billion in cash/investments, we would hold shares.

GlaxoSmithKline (GSK): Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analyst: Shoichiro Matsubara

GlaxoSmithKline's first-quarter earnings per ADR rose 14% to 81 cents, 8 cents above our forecast. Although sales growth of 4% was somewhat below our expectations, pretax margins widened to 34% from 30%, helped by tight control over selling, general, and administrative and research and development spending. GlaxoSmithKline is resolving FDA-cited manufacturing problems at Puerto Rican plants, as new consent decree expected to allow the company to resume production by mid-year. We are raising our 12-month target price by $5 to $49, based on a blend of our forward p-e, in line with peers, and discounted-cash-flow models. Dividends paid over the past 12 months amounted to $1.56.

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

Analyst: Tuna Amobi, CPA, CFA

We have updated our models to reflect our view of 1.6 million to 1.7 million net subscriber adds in 2005, bringing total near 2.8 million. With continued growth in retail and auto original equipment manufacturer channels, we estimate Sirius's subscription count could jump to 6.7 million by 2006 end. But with Howard Stern's $100 million/year contract set to weigh on programming costs starting Jan. 6, we now see free cash breakeven in 2008, vs. prior 2007. We have cut our target price by $1.50 to $5.50. However, based on post-first-quarter guidance for subscriber acquisition costs, churn and EBITDA loss, we see 2005 and 2006 losses per share of 50 cents and 59 cents.

Archer-Daniels-Midland (ADM): Reiterates 3 STARS (hold)

Analyst: Jonathan Agnese

Shares are down sharply today as Archer-Daniels-Midland posted March-quarter operating earnings per share of 30 cents, vs. 33 cents, 14 cents below our estimate. Results were hurt by narrower oilseed processing margins in North America, which outweighed impact of sequential improvement in net corn costs and strong demand. Oilseed margins are being hurt by competitors' increases in North America crushing capacity. With Archer-Daniels-Midland's capacity utilization levels declining as a result, we are cutting our fiscal 2005 (ending June) and fiscal 2006 estimates by 30 cents and 20 cents, to $1.31 and $1.40, and our 12-month target price by $5, to $19, based on p-e analysis.

ABN Amro ABN: Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Jason Seo, CFA

ABN Amro posted first-quarter earnings per ADR of 70 cents, vs. 69 cents, in line with our estimate. While we are encouraged by asset disposals and efforts to establish a value-focused culture, we think bottom-line benefits will take time to feed through. We also believe more can be done to reduce costs. We are cutting our 2005 earnings per ADR estimate by 80 cents to $2.37, setting 2006's at $2.50. We are lowering our 12-month target price by $5 to $26, 11 times our 2005 estimate. However, we view positively ABN Amro's plan to acquire Banca Antonveneta, pending necessary approvals.

KLA-Tencor (KLAC): Maintains 4 STARS (buy)

Analyst: Colin McArdle

KLA-Tencor reported March-quarter earnings per share of 61 cents, vs. 33 cents, above our 54 cents estimate as several orders were pulled in from the current June-quarter quarter, we believe, and gross margin widened. However, KLA-Tencor provided guidance for June-quarter earnings per share of 46 cents to 48 cents. We are lowering our June-quarter earnings per share estimate to 47 cents from 56 cents, and full fiscal 2005 (ending June) earnings per share estimate to $2.27 from $2.29. Amid lower peer-group valuations, we apply a 22 times multiple to our calendar 2005 earnings per share estimate, and derive a $46 target price, lowered today from $56.

Invitrogen (IVGN): Reiterates 5 STARS (strong buy)

Analyst: Mark Basham

First-quarter earnings per share of 88 cents, vs. 62 cents beats our 77 cents estimate. Even excluding 5 cents of non-recurring gains, we view the quarter as exceptional. New products fueled higher bio-discovery segment revenues than we had expected, and gross margins in both bio-discovery and bio-production were higher than we had forecast. We are raising our earnings per share estimates for 2005 to $3.50 from $3.35, and for 2006 to $4.15 from $4.00. As we expect Invitrogen to accelerate capital investment to drive new product development over the long term, our free cash flow assumptions, and hence our $100 target price, are unchanged.


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