Markets & Finance

S&P Ups Target on XM Satellite, Keeps Hold


XM Satellite Radio (XMSR): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

We are raising our 12-month

discounted-cash-flow-based target price $4 to $36 on our forecast of positive free cash in 2006. Also, we adjusted our model as customer churn from the Apr. 2, 2005, hike in the basic monthly subscription fee to $12.95 from $9.99 may be less than we had thought, with price lock-ins under multi-year plans. We see strong fundamentals for satellite radio, as XMSR recently surpassed 4 million subscribers, and affirmed a long-term goal of 20 million by 2010. But stock seems to us to reflect much of growth ahead, and our enthusiasm is also tempered by stiff competition for customers, programs, and talent from rival Sirius.

Hewlett Packard (HPQ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Today's Wall Street Journal reported that Hewlett-Packard's NonStop high end server line is expected to transition to Intel's Itanium chip. Although sales of Itanium-based servers have been below our expectations to date, there has been some recent momentum. While we believe HP could potentially garner some cost benefits by spreading Itanium across more than one server line, we also see some risk as HP appears to be doubling up on its bet on the chip. No change to our fiscal 2005 (ending October) earnings per share estimate of $1.53. With shares trading at price per share of 0.8 time, below peer average, we view HP as worth holding.

Motorola (MOT): Maintains 4 STARS (buy)

Analyst: Kenneth Leon, CPA

A Barron's article suggests that consumer loyalty to wireless carriers and handset suppliers is elusive. According to a market survey, the industry leaders with the highest brand loyalty are Research in Motion, Motorola, Nokia and Sony Ericsson, a joint venture of Sony and L.M. Ericsson. We believe customer satisfaction is closely tied to customer retention, and we have seen monthly churn decline for the entire U.S. wireless services market. However, we do see handset subsidies increasing throughout the year.

Research In Motion (RIMM): Reiterates 5 STARS (strong buy)

Analyst: Kenneth Leon, CPA

Today, Cingular selected Good Technology Inc.'s wireless email service, which has 6,000 corporate clients vs. RIMM's 42,000. Closely-held Good Technology and Viso Corp., are making inroads as RIMM battles market leader, Nokia, and palmOne Inc. We are not concerned about wireless carriers expanding their vendor list for wireless email, as we believe RIMM has the largest partner list among global wireless carriers, and the market penetration for email devices is well below cellular. Priced above peers on p-e but growing faster, we find RIMM attractive.

Medco Health Solutions (MHS): Maintains 3 STARS (hold)

Analyst: Phillip Seligman

In an unconfirmed story, The Wall Street Journal reports Medco Health's decision not to comply with a U.S. Health & Human Services (HHS) subpoena for alleged Medco agreements with drugmakers to favor their drugs, unless HHS agrees not to share the papers with a Justice Department probe that alleges Meco defrauded the government. We see Medco weathering probes, but think allegations may weaken it competitively. As its independent pharmacy benefit manager peers are also facing government probes, we would not be surprised if more state and federal government business eventually goes to HMOs' captive pharmacy benefit managers.

Valero L.P. (VLI): Reiterates 2 STARS (sell)

Analyst: Royal Shepard

Valero announces the signing of a consent decree with the FTC to resolve certain concerns regarding its pending merger with Kaneb Services and Kaneb Pipe Line Partners, pending necessary approvals. Terms of the agreement include sale of several U.S. terminal facilities to third parties by the end of 2005. The transaction doesn't significantly alter our view of the merger, which we still expect to be accretive to cash flow. Our 2005 earnings per share estimate remains $3.20. Our 12-month target price of $57 is based on a blend of target yield and price-to-cash flow metrics.

Novellus Systems (NVLS): Maintains 5 STARS (strong buy)

Analyst: Colin McArdle

Novellus offers regular mid-quarter update guidance, raising its second-quarter earnings per share forecast to 20 cents to 22 cents from 17 cents to 20 cents, in line with our 20 cents expectation. We are maintaining our current full-year 2005 earnings per share forecast of 96 cents. Management indicates that a rebound in Asia, specifically consumer-driven demand in Japan, would push second-quarter revenue to $325 to $330 million, modestly above our $322 million estimate. We continue to look for a rebound in demand for semi equipment in the second half of 2005, and maintain our strong buy recommendation on Novellus shares.


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