Markets & Finance

S&P Keeps Strong Buy on Citigroup


Citigroup (C): Reiterates 5 STARS (strong buy)

Analyst: Evan Momios, CFA, Mark Hebeka, CFA

Citigroup announced today that it has agreed to a settlement in the Enron class action suit, Newby, et al., v. Enron Corp., et al., currently pending in the U.S. District Court for the Southern District of Texas, Houston Division. Under the terms of the settlement, Citigroup will make a payment of $2.0 billion to the settlement class. The settlement is fully covered by Citigroup's existing litigation reserves and the company plans no reserve adjustment. Our 2005 and 2006 operating earnings per share estimates remain at $4.30 and $4.75, and our 12-month target price at $57.

Intel (INTC): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

We believe the improved second-quarter sales outlook given by Intel in its mid-quarter update chiefly reflects strength in mobile computing, as the most recent version of the company's Centrino wireless platform strategy (codename Sonoma) pays off. Demand was healthy in all geographies. Intel's improved second-quarter margin forecast is based on lower microprocessor unit costs than expected and lower manufacturing startup costs than expected for the 65 nanometer process technology, and increased mix of higher-margin notebook chips. In flash memory, Intel continues to see a very competitive environment.

Ameritrade Holding (AMTD): Reiterates 3 STARS (hold)

Analyst: Robert Hansen, CFA

AmeriTrade posted average May trades per day of 133,000, down from 140,000 in April and well below 167,209 average in the Mach-quarter. We were surprised by lower trading volumes, given equity market appreciation in May, but project rebound in fiscal 2006 (ending September). We are lowering our fiscal 2005 earnings per share estimate to 75 cents from 78 cents to reflect lower trading volumes and margin balances. Our target price is $14, nearly 19 times that estimate, about in line with peers. We see the company benefiting from potential industry consolidation. But we think competition remains intense and view AmeriTrade's current valuation as fair.

Nortel Networks (NT): Maintains 3 STARS (hold)

Analyst: Kenneth Leon, CPA

In our view, Nortel's financial outlook is not impaired by the announced resignation of its COO, who joined the company less than three months ago. The company cites a difference in management styles between the CEO and COO. A former executive of Cisco Systems, we believe the COO wanted to move Nortel to the enterprise market, while the CEO, with a military background, has pushed the company toward the government sector, as evidenced by Nortel's recent agreement to acquire PEC Solutions for $445 million, subject to necessary approvals. Priced at 1 time our 2005 sales estimate, we would hold Nortel shares.

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

Analyst: Efraim Levy, CFA

GM shares are higher today following press reports that the UAW may help GM reduce its rising healthcare costs. We believe the union would not reopen the employment contract with GM before expiration in 2007, but could consider working within the agreement. While we think this would be good news, we do not expect any potential gains to be worth a further rally in GM share price. Given GM's current difficulties and pressures, we view the share price rise as an enhanced selling opportunity.

RealNetworks Inc. (RNWK): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Scott Kessler

RealNetworks Inc. is lower today following unconfirmed News.com story, indicating Microsoft is readying a subscription online-music service. RealNetworks alluded to such plans during its recent analyst meeting, but the stock's reaction today indicates to us that an entry by Microsoft is not already priced into the shares. We also think there is a good chance that Apple and perhaps others will explore such offerings in the coming months. Despite appealing franchises, concern about competition causes us to lower our opinion and to cut our target price to $6.50 from $8.

Macromedia Inc. (MACR): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Shares of Adobe Systems, which has agreed to acquire Macromedia for stock and pending approvals, are down notably following a report from News.com that Microsoft recently made available a beta download of a new illustration, painting and graphics tool code-named Acryllic. The software appears to us intended to compete with Adobe's franchise Photoshop and Illustrator offerings. We think Adobe has fared well against Microsoft, and that Macromedia would be of help. However, we think Microsoft's expected Acryllic and Maestro offerings are cause for some concern.

Adobe Systems (ADBE): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Adobe is down notably following a report from News.com that Microsoft recently made available a beta download of a new illustration, painting and graphics tool, code-named Acryllic. The software seems to us comparable to Adobe's franchise Photoshop and Illustrator offerings. We think Adobe has competed well against Microsoft, and that the proposed purchase of Macromedia, which we expect to be completed in November, pending approvals, would be of help. But we think Microsoft's upcoming Acryllic and Maestro offerings are cause for some concern.


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