Markets & Finance

S&P Keeps Hold on IBM


International Business Machines (IBM): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

IBM announced it is bolstering its Tivoli infrastructure management software with a definitive agreement to buy privately-held Isogon Corp. Isogon's technology helps track software inventory automatically and measures usage of software running on mainframes. Terms of the deal weren't disclosed but we think it makes strategic sense, as it should help provide a broader solution set for solving customer issues including compliance with Sarbanes-Oxley, software licensing, etc. No change to our estimates. At a price/sales of 1.3 times, in line with peer average, we view IBM as worth holding.

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

Analyst: Robert Hansen, CFA

Goldman Sachs posted May-quarter earnings per share of $1.71, vs. $2.31, below our $2.02 estimate, hurt by lower financial advisory, fixed income trading, and principal investment revenue. We had expected a tough quarter given a flattening yield curve, widening credit spreads, and volatile equity markets, but see a rebound in the second half of fiscal 2005 (ending November). We are lowering our fiscal 2005 earnings per share estimate to $9.50 from $9.70, but keeping our 12-month target price at $140. We would use weakness in Goldman Sachs shares as an enahnced buying opportunity, given our view of its strong competitive position and highly attractive valuation.

Pfizer (PFE): Reiterates 3 STARS (hold)

Analyst: Herman Saftlas

Pfizer agrees to acquire Vicuron, an R&D firm focused on anti-infectives, for $1.9 billion in cash. Vicruson has two products under FDA review, an antifungal and a drug for gram-positive infections. The planned deal, subject to approvals, would expand Pfizer exposure in biotech, while preparing replacements for patent expirations on Diflucan and Zithromax. The deal may be funded by repatriated foreign cash (Pfizer can repatriate up to $28 billion). Our 12-month target price remains $29, 13.3 times our 2006 estimate, below peers, based on our view of pipeline and Lipitor litigation risks.

Network Appliance (NTAP): Reiterates 3 STARS (hold)

Analyst: Richard Stice, CFA

Network Appliance announces it has agreed to acquire Decru, a privately held storage security company, for about $272 million, with the payment to be comprised of 80% stock and 20% cash. The acquisition is set to close by October, pending necessary approvals, and is expected to be modestly dilutive for the first three quarters following consummation. We view this news positively, as we believe it broadens Network Appliance's addressable market and strengthens its industry position. But with the shares trading near our 12-month target price of $31, we view upside potential as limited.

Conseco (CNO): Reiterates 4 STARS (buy)

Analyst: Gregory Simcik, CFA

We are raising our 12-month target price from $22 to $24 on a higher 13.5 times p-e appplied to our 2005 operating earnings per share est of $1.75. A p-e premium to peer group average reflects our view of potential upside, especially for independent agent sales, if Conseco's financial strength rating improves. Moreover, we believe allowances against deferred tax assets, including net operating loss carryforwards, may decrease if operations keep improving. We continue to see Conseco focusing on cost cuts in 2005, in an effort to bolster earnings in the face of revenue growth we expect will be modest.

J.M. Smucker (SJM): Maintains 3 STARS (hold)

Analyst: Richard Joy

April-quarter earnings per share before special items at 58 cents, vs. 52 cents is a penny above our estimate. Full fiscal 2005 (ending April) earnings per share was $2.60, vs. $2.40. Fourth-quarter organic sales growth was a strong 8%, benefiting from gains across J.M. Smucker's brand portfolio. We expect recent price hikes to help offset cost inflation, and are keeping our fiscal 2006 earnings per share estimate at $2.95. We anticipate increased marketing investment will maintain core brand momentum, and expect continued cost improvement from new production facility through fiscal 2006. We are raising our 12-month target price by $3, to $53, or 17 times our calendar 2006 estimate of $3.15.

Unocal (UCL): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Charles LaPorta

Unocal says the FTC has accepted the plan for its acquisition by Chevron. Thus, we are raising our target price by $2, to $66, based on the current deal terms and our target price of $65 for Chevron. SEC and shareholder approvals are still needed. We believe the potential for an unsolicited competing bid is remote. Based on Unocal's 2004 proved reserves, we estimate that Chevron is paying $10.55 per barrel, which we believe is rich for a supermajor. We think this metric will decline as Unocal books reserves from its emerging production projects in southeast Asia.

New York Times (NYT): Reiterates 3 STARS (hold)

Analyst: James Peters, CFA

The New York Times provided updated 2005 guidance today, including $10 million in estimated second-quarter staff reduction charges for previously announced layoffs (4 cents per share), about $13 million more than previously anticipated 2005 option expenses (5 cents), a marginally lower tax rate, a lower estimated increase in newsprint costs and about $20 million less in capex. Given our revised projection of higher option expenses but lower other costs and taxes, we are trimming our 2005 earnings per share estimate to $1.61 from $1.65, before staff reduction charges, and maintaining our 12-month target price at $35.

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

Analyst: Royal Shepard

The FTC clears Valero's acquisition of Kaneb Services LLC and Kaneb Pipe Line Partners, L.P. Closing is expected on July 1. As previously reported, Valero has agreed to sell several U.S. terminal facilities to third parties by the end of 2005. In addition, Valero continues to anticipate an increase in its annual distribution rate from $3.20 per unit to $3.42. Our 2005 earnings per unit estimate remains $3.20 per share. Our 12-month target price remains $57, based on a blend of target yield and price-to-cash flow metrics.


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