Markets & Finance

S&P Keeps Hold on Morgan Stanley


Morgan Stanley (MWD): Reiterates 3 STARS (hold)

Analyst: Robert Hansen, CFA

Morgan Stanley says Chairman and CEO Purcell plans to retire as soon as a successor is named. The company also guides for second-quarter earnings per share about 15%-20% below a year ago. Although we do not see a takeover of Morgan Stanley as likely, we do expect a spinoff of its Discover segment to move forward. We are lowering our fiscal year 2005 (November) EPS estimate to $4.40 from $4.50. But, we are raising our target price to $53 from $50, or to 12 times our new estimate. Although we view favorably the departure of Purcell, we think diminished employee morale and continued media attention will negatively impact fundamentals in 2005.

Northwest Airlines (NWAC): Reiterate 3 STARS (hold)

Analyst: James Corridore

NWAC shares are off about 18% today, which we attribute partly to a Wall Stree Journal article outlining the potential for NWAC to go bankrupt if it is unable to get the cost cuts it seeks. In addition, according to SEC filings on Friday, Chairman Gary Wilson has sold more than 1 million shares in the past week, and 2.5 million since mid-May. We continue to believe that NWAC has a 50-50 chance to get labor concessions, which we think would be needed to keep the company out of bankruptcy. However, without concessions, we view bankruptcy as an increasing possibility.

Google (GOOG): Reiterates 3 STARS (hold)

Yahoo (YHOO): Reiterates 4 STARS (buy)

Analyst: Scott Kessler

S&P believes that Yahoo recently won The Washington Post as a publishing customer, enabling its website's search capabilities and providing associated sponsored advertisements. Google had previously provided comparable services to The Post. Although we do not believe this shift will have a material impact on either company's financials, we think it underscores the increasingly competitive environment in online search services. Our opinions on Yahoo and Google in part reflect their diversification beyond the Internet search segment.

BMC Software (BMC): Downgrading to 2 STARS (sell) from 3 STARS (hold)

Analyst: Zaineb Bokhari

BMC delays 10-K and March-quarter earnings release by 15 days, citing a need for more time to prepare financial statements and comply with Sarbanes Oxley 404. We are concerned that a review of its internal controls could trigger downward revisions to already lowered guidance, and we are cutting fiscal year 2006 (ending March) estimate by 7 cents, to 83 cents. BMC trades near bottom historical p-e range, warranted, we think, by our view of recent poor execution and uncertainty around future results. On relative analysis, we are cutting our 12-month target price to $16 from $19.

Nordstrom (JWN): Downgrading to 3 STARS (hold) from 4 STARS (buy) based on valuation

Analyst: Jason Asaeda

JWN shares are approaching our 12-month target price of $67. We continue to believe that the company is increasing its "share of wallet" among well-heeled baby boomers, based on our view of its trend-right, age-appropriate apparel styles. We also believe that JWN's new fashion labels are attracting a growing base of younger customers. Coupled with markdown optimization and productivity gains from technology investments, we look for the company to sustain its strong sales and earnings momentum over the rest of fiscal year 2006 (January). Our fiscal year 2006 EPS estimate remains $3.50.

News Corp. (NWS.A): Reiterates 5 STARS (strong buy)

Analyst: Tuna Amobi,- CPA, CFA

The shares are up today as the company sets a 2-year $3 billion program for repurchasing equal numbers of A and B shares. We think the shares offer an attractive opportunity for capital return to shareholders. Also, after the tender for Fox Entertainment, we believe the buyback news should help address persistent questions on the potential use of considerable free cash flow. We see free cash of $2.7 billion in fiscal year 2005 (June) and, with full-year positive contributions from newly acquired Sky Italia, $3.4 billion in fiscal year 2006. Our sum-of-parts target price for NWS.A is $24, including affiliates DirecTv and BSkyB.


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