Markets & Finance

S&P Keeps Strong Sell on GM


General Motors (GM): Reiterates 1 STAR (strong sell)

Analyst: Efraim Levy, CFA

GM announces a strategy to improve performance, including cutting U.S. manufacturing jobs by 25,000 and closing some facilities by 2008. We think investors will look favorably the articulation of a plan to reduce fixed costs and enhance competitiveness. But despite progress in certain areas, we think benefits of GM's initiatives will take time to accrue and it faces challenges that include delivering products that will help it stabilize and recapture market share. It also faces higher-than-peer healthcare costs that leave it, in our view, at competitive cost disadvantage.

Audible Inc. (ADBL): Upgrades to 5 STARS (strong buy) from 2 STARS (sell)

Analyst: Scott Kessler

Audible today announces a broad-ranging and exclusive technology, content, and marketing partnership with XM Satellite Radio. We believe this relationship will dramatically broaden Audible's market opportunity, to eventually include what we consider the very attractive automotive-audio market. We are raising our target price to $25 from $13, relying on revised discounted-cash-flow analysis, reflecting a reduced discount rate owing to a decline in Audible's beta. Despite some competitive concerns, we think Audible's competitive advantages will enable it to deliver compelling future growth.

Martha Stewart Living (MSO): Reiterates 2 STARS (sell)

Analyst: Gary McDaniel

At a conference today, CEO Susan Lyne stated that advertising pages at the flagship magazine would rise over 40% this quarter, with revenues up significantly more than 40%. But assuming second-quarter ad pages rise 40% from a year earlier and revenues rise 45%, we estimate these increases would result in pages down 25% from 2003 and 49% from 2002, before Stewart's legal problems, while revenues would be down 35% and 54% from those years. We continue to believe that MSO, from an operational standpoint, is turning a corner. However, we continue to view its shares significantly overvalued.

Sears Holdings (SHLD): Reiterates 3 STARS (hold)

Analyst: Jason Asaeda

Including the Sears segment for a full 13-week period, April-quarter earnings per share of 10 cents, vs. 38 cents misses our 39 cents estimate. Expenses were de-leveraged on same-store sales declines of 3.7% at Kmart and 3.1% at Sears. We are cutting our fiscal 2006 (ending January) earnings per share estimate to $5.85 from $6.92, to reflect soft sales. But we see upside potential, given improving gross margins in Sears segment. Sears Holdings also ended the April-quarter with net debt of $2.8 billion, well below our $4.7 billion projection. As a result, we are raising our target price to $146 from $141, based on updated peer p-e and enterprise value/EBITDA valuations.

ConAgra Foods (CAG): Maintains 2 STARS (sell)

Analyst: Rick Joy

ConAgra says it sees lower-than-expected May-quarter earnings per share on high protein input costs and pricing pressures in its packaged meats business. We are reducing our fourth-quarter and fiscal 2005 (ending May) earnings per share estimates by 10 cents, to 25 cents and $1.34, respectively. We are also reducing our fiscal 2006 earnings per share estimate by 10 cents to $1.45. While ConAgra's efforts to improve its cost structure and pricing management should eventually help earnings, we believe it will take several quarters to see results. We see its shares as unattractive given our view of cost pressures and poor near-term earnings per share visibility. Our target price remains $24.

Chiron (CHIR): Maintains 1 STAR (strong sell)

Analyst: Frank DiLorenzo, CFA

An FDA panel splits on the efficacy of Pulminiq for lung-transplant rejection. An FDA decision is expected by July 14. Irrespective of the outcome, we view Pulminiq as a small opportunity with peak annual sales potential below $100 million and consider Chiron's pipeline below average. We assume no more than 20M million doses of Fluvirin will be sold for the 2004/2006 flu season. With p-e-to-growth of 2.1 times our 2005 earnings per share estimate and 1.8X 2006's, compared to 1.7 times and 1.3 times for peers, and our forecasted earnings per share growth rate of 12.9%, against peers' 23.3%, we view shares as overvalued. Our 12-month target price remains $29.

Berkshire Hathaway (BRK.A): Keeps 2 STARS (sell)

Analyst: Catherine Seifert

The company announces the resignation of former General Re unit executive John Houldsworth, who has pleaded guilty to conspiracy charges and is cooperating with the AIG investigation. We expect continued news flow related to General Re's involvement in the alleged mis-statement of AIG's financial results via the use of finite reinsurance provided by General Re. Although we think Berkshire Hathaway has a number of valuable franchises, we believe the financial strength premium that is embedded in the shares will further erode. Our 12-month target price remains $80,000.

Xilinx (XLNX): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Xilinx appoints Jon Olson, who is currently a senior-level manager at Intel, to be its next CFO. Current CFO Kris Chellam will remain at Xilinx in a senior management capacity. We believe Mr. Olson is an appropriate candidate for the job, given his significant finance-related management experience and industry background. We are keeping our hold opinion on Xilinx. Despite a decline in the share price over the last 12 months, we think current valuation multiples are warranted, given what we see as elevated near-term macro uncertainty. Our 12-month target price remains $32.

Monsanto (MON): Reiterates 1 STAR (strong sell)

Analysts: Andrew West, CFA, Richard O'Reilly, CFA

Monsanto raises May-quarter earnings per share guidance by 5 cents, to $1.05 before charges, but leaves full fiscal 2005 (ending August) at $2.00 to $2.05. It sees its May-quarter aided by strong U.S. sales of biotech traits, higher corn seed sales, greater cotton trait revenue in India, and favorable timing of Roundup herbicide sales in U.S. and Europe. We are leaving our fiscal 2005 earnings per share estimate at $2.18, and fiscal 2006's at $2.50. We continue to think Monsanto's operations have relatively high business risks, and see only moderate long-term earnings per share growth. Based on a blend of our discounted-cash-flow and relative value models, our 12-month target price remains $48.


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