Markets & Finance

S&P Keeps IBM, Apple, Intel at Hold


Apple Computer (AAPL): Reiterates 3 STARS (hold)

IBM Corp. (IBM): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Apple said today that it plans to switch to Intel chips from its current Power PC chip, which IBM makes in conjunction with Freescale Inc. The move was expected. Apple plans to launch Intel-based systems by this time next year, and transition its full line by end of 2007. We expect the transition to be eased by Apple's gradual and phased shift, and note that it announced the early availability of Developer's Transition Kit to help. Our estimates are unchanged, and we continue to view Apple, trading above peers on ratios of enterprise value to sales, and p-e, as fairly valued for strong cash position, product design success.

As for Big Blue, we do not view Apple as a critical customer for IBM's chips, and note that over the past year, and again at IBM's analyst meeting in May, the company has emphasized its focus on supplying chips to the video game console market. We have made no change to our estimates. We view IBM shares as worth holding, trading at a price/sales ratio of 1.3 times, in line with peer average.

Intel (INTC): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

We see the Apple news as a positive for Intel, as it fortifies an already dominant market share position in the PC microprocessor segment. We think Intel has been

working closely with Apple and software vendors to ensure a seamless transition of Apple PCs to Intel's x86-based architecture. We see Intel as fairly valued, based on p-e and price-to-sales analyses.

Agilent Technologies (A): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Today's Wall Street Journal reports that Agilent is expected to put its semiconductor unit up for sale. We believe such a sale is logical given the high cyclicality of the semiconductor business and Agilent's role as a relatively small supplier in the market. In addition, over the past year, Agilent has made efforts to reduce the volatility of its quarterly results. The unit had fiscal 2004 (ending October) sales of $2 billion. We would expect it to sell for around 0.75 times sales, or $1.5 billion, with some of the proceeds likely to be used to pay down debt. We view Agilent shares as fairly valued, trading in line with peers at price/sales of 1.7 times.

Goldman Sachs (GS): Reiterates 5 STARS (strong buy)

Analyst: Robert Hansen, CFA

We are lowering our fiscal 2005 (ending November) earnings per share estimate to $9.70 from $10.00 to reflect our view of the flattening yield curve, widening credit spreads, and volatile equity markets. Although we expect revenue to be weak in the May-quarter, we see a rebound in proprietary trading, equity underwriting, merger advisory, and merchant banking gains in fiscal 2006. We are trimming our 12-month target price to $140 from $150, or to about 14 times our fiscal 2005 estimate and a modest premium to peers. Having declined about 6% so far in 2005, Goldman Sachs shares trade at about 10 times our fiscal 2005 earnings per share estimate, a level we view as attractive.

Providian Financial (PVN): Maintains 3 STARS (hold)

Analyst: Evan Momios, CFA

The announced agreement for the sale of Providian Financial to Washington Mutual concludes company management's three-year turnaround efforts. The planned deal is expected to close in fourth-quarter, subject to necessary approvals. We think the deal supports our view that credit card lending remains an attractive business for large depository institutions. Completion of this deal would leave MBNA as the only independent credit card issuer with a sizeable card receivables portfolio. We are lowering our target price for Providian by $1 to $18, based on our target price of $41 for Washington Mutual.

ProLogis (PLD): Reiterates 4 STARS (buy)

Analyst: Robert McMillan

ProLogis agrees to acquire Catellus Development for $4.9 billion, including $1.3 billion of assumed debt. Catellus holders would get $33.81 per share in cash, ProLogis shares, or a combination. The deal, subject to shareholder and other customary approvals, is expected to close by the end of 2005, and ProLogis sees it as accretive to 2006 funds from operations. We view the deal as favorable, since it should enhance ProLogis's market position. For now, we are maintaining our 2005 and 2006 estimates of per-share funds from operations at $2.58 and $2.74, and our 12-month target price of $45. ProLogis is yielding 3.7%.

Catellus Development (CDX): Maintains 3 STARS (hold)

Analyst: Jason Seo, CFA

Catellus and ProLogis announce that their boards have approved a definitive agreement for ProLogis to acquire Catellus for approximately $4.9 billion. Subject to necessary approvals, Catellus shareholders will be able to elect $33.81 cash or 0.822 ProLogis share per Catellus share, or a combination of the two. We view the transaction as positive for the long term, based on the proposed combined company's large network of distribution facilities and services. We are increasing our 12-month target price by $4, to $34, in line with ProLogis's offer.

Gateway (GTW): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Gateway announces that CFO Rod Sherwood, plans to retire later in 2005. We have found Mr. Sherwood to be a capable and straightforward CFO and expect him to play a significant role in selecting a replacement. We believe the transition comes at a key juncture for Gateway, since the competitive landscape in the PC industry has changed and because the company needs to adjust its cost structure to compete profitably against peers and better penetrate the small- to mid-size business market. Still, with its shares trading below peers, at a price/sales of 0.3 times, we view Gateway as worth holding.


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