Markets & Finance

S&P Keeps Buy on Lowe's


Lowe's (LOW): Reiterates 4 STARS (buy)

Analyst: Michael Souers

Lowe's posted April-quarter earnings per share of 74 cents, vs. 56 cents, 2 cents shy of our estimate. Sales increased 14%, including same-store sales growth of 3.8%, slightly below our estimates. The company blamed a wet and cold March for the lower-than-expected sales. However, a reduction of inventory levels, an increased cash position and management's reiteration of earnings guidance for fiscal 2006 (ending January) has sent Lowe's shares higher today, in our opinion. We are lowering our fiscal 2006 earnings per share estimate to $3.31 from $3.34, but our fiscal 2007 estimate stays $3.85. Our 12-month target price, based on discounted-cash-flow analysis, remains $65.

United Parcel Service (UPS): Reiterates 3 STARS (hold)

Overnite Corp. (OVNT): Reiterates 3 STARS (hold)

Analyst: James Corridore

UPS agrees to acquire Overnite Corp., a less-than-truckload carrier with $1.7 billion in revenues, for $1.25 billion cash or $43.25 per share, a 46% premium to Overnite's Friday close. While the purchase price is not cheap, we like the deal, as we think the business is a good strategic fit, it gives UPS a fairly comprehensive suite of shipping solutions, and UPS should be able to wring significant costs out of the system. We see UPS as a core holding with a high quality of earnings and good growth prospects. Our 12-month target price remains $75, 22 times our 2005 earnings per share estimate.

United Parcel Service (UPS): Reiterates 3 STARS (hold)

Overnite Corp. (OVNT): Reiterates 3 STARS (hold)

Analyst: James Corridore

UPS agrees to acquire Overnite Corp., a less-than-truckload carrier with $1.7 billion in revenues, for $1.25 billion cash or $43.25 per share, a 46% premium to Overnite's Friday close. While the purchase price is not cheap, we like the deal, as we think the business is a good strategic fit, it gives UPS a fairly comprehensive suite of shipping solutions, and UPS should be able to wring significant costs out of the system. We see UPS as a core holding with a high quality of earnings and good growth prospects. Our 12-month target price remains $75, 22 times our 2005 earnings per share estimate.

EMC Corp. (EMC): Reiterates 5 STARS (strong buy)

Analyst: Richard Stice, CFA

EMC introduced its new storage virtualization product, Invista. The product is set to be generally available beginning in the third quarter, with a focus on the high end of the storage marketplace. We view the announcement positively, as we believe it broadens the company's overall portfolio and fits well with its information lifecycle management initiative. We continue to view the shares positively, given, in our opinion, EMC's favorable industry

position, ongoing market share gains and consistent free cash flow generation. Our 12-month target price is $21.

Limited Brands (LTD): Maintains 3 STARS (hold)

Analyst: Marie Driscoll, CFA

Limited reports April-quarter earnings per share of 6 cents, vs. 13 cents, adjusted, below our 10 cents estimate on 19% fewer shares. Apparel saw a $68.5 million operating loss and its poor performance continues to penalize results, despite our view of exciting products development and brand extensions at Bath & Body Works and Victoria's Secret. Comparable-store sales rose 5%: flat at Victoria's Secret, 5% higher at Bath and Body Works, and 18% higher for apparel. We are lowering our fiscal 2006 (ending January) earnings per share estimate to $1.40 from $1.65. We also lower our 12-month target price to $23 from $27, applying a 15% discount to the 19 times forward multiple for Limited's peer group.

Charles Schwab (SCH): Maintains 3 STARS (hold)

Analyst: Robert Hansen, CFA

Charles Schwab reports 7.1% month-over-month decrease in revenue trades and a 1.5% decline in client assets for April. Despite the drop in trading activity, we think lowered commission rates are actually encouraging clients to trade more. Furthermore, we expect additional cost and headcount reductions, growth in mutual fund fees, and continued client inflows to benefit earnings per share in 2005. We are maintaining our 2005 earnings per share estimate of 50 cents. We are raising our 12-month target price to $11 from $10, 22 times our 2005 earnings per share estimate.

Brocade Communications (BRCD): Reiterates 3 STARS (hold)

Analyst: Richard Stice, CFA

Brocade announces a financial restatement for fiscal 2001 (ending October) through fiscal 2004, to account for additional charges related to stock-based compensation. Based on preliminary estimates, Brocade expects to incur non-cash expenses of $31 million to $52 million over this period. There is no impact to historical revenues or cash positions. We are disappointed by this news and believe it is the result of the prior management team's liberal stock option grant policies. But, with our view of Brocade's favorable industry position and close to $3/share in cash and investments, we think further downside risk is limited.


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