Markets & Finance

S&P Keeps Strong Sell on GM


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

Analyst: Efraim Levy, CFA

Per J.D. Power and Associates, GM's promotion offering employee-level discounts to all customers has increased its market share in the first 12 days of June to 30%, up from 23% in June 2004. (J.D. Power, like Standard & Poor's and BusinessWeek Online, is owned by The McGraw-Hill Companies.) We view this news as positive, since it should help reduce inventory levels and clean out 2005 vehicle models ahead of fresher models. However, we do not expect competitors to sit idly by and allow GM to retake share. Also, the long-term benefit may be more limited and the impact on profits per sale is unclear.

Circuit City (CC): Maintains 3 STARS (hold)

Analyst: Amy Glynn, CFA

May-quarter loss per share of 7 cents, vs. a loss of 3 cents is wider than our 2-cent loss estimate. Sales rose 6.4%, but were flat at comparable stores as strength in key categories such as advanced TVs and portable audio products was offset by weakness in IT products and music. Circuit City says costs from the brand transition in Canada and investments for business upgrades offset gross margin improvement. Circuit City maintains its fiscal 2006 (ending February) guidance for 3% to 6% sales growth and operating margin of 1.3% to 2.3%.

XM Satellite Radio (XMSR): Reiterates 3 STARS (hold)

Sirius Satellite Radio (SIRI): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

We view the award by the Canadian Radio-TV and Telecom Commission of broadcast licenses to XMSR and Sirius as long-term plus for satellite radio. But the ruling came with strings attached on Canadian content standards, as both XM and Sirius must offer at least eight original channels produced in Canada, with 85% local programming. Still, conditions do not seem overly onerous to us. Over the coming year, both players should move to tap a new addressable market for subscriptions and advertising services as they iron out final issues with local partners prior to launch.

KB Home (KBH): Maintains 3 STARS (hold)

Analyst: William Mack, CFA

KB Home posted May-quarter earnings per share of $2.06, vs. $1.20, above our $1.89 forecast. With considerable operating leverage arising from the 12% to 15% home price appreciation we now project for fiscal 2005 (ending November), we think KB Home's gross margin will increase about 300 basis points this year. We are raising our fiscal 2005 earnings per share estimate to $9.15 from $8.20, and setting our initial fiscal 2006 projection at $10.50. We see valuations improving group-wide on increasing visibility into 2006, and we now think KB Home should trade at a p-e multiple of nearly 10 times, above the group median. We are raising our 12-month target price to $90 from $65.

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

Analyst: Scott Kessler

Adobe posted May-quarter earnings per share of 28 cents, before 2 cent benefit from repatriation of foreign earnings, vs. 22 cents, a penny above our forecast. Revenues rose 21%, reflecting strength in Creative Suite and Acrobat sales. However, the company's guidance for August-quarter revenues was lower than our forecast, and we are now trimming our projection by 2% to reflect greater seasonality than we had expected. Nonetheless, based on May-quarter results and our unchanged estimates for the rest of fiscal 2005 (ending November), we are raising our full-year earnings per share forecast to $1.09 from $1.07. Our discounted-cash-flow-based target price remains $34.

Sanofi-Aventis (SNY): Reiterates 3 STARS (hold)

Analyst: Shoichiro Matsubara

A U.S. Court rules in favor of generic challenger to Lovenox blood thinner, which contributed 7.6% of Sanofi-Aventis's 2004 sales, though we note that the generic is still subject to the resolution of various regulatory issues. However, we also note that a generic victory in Lovenox raises concern about upcoming court challenge to Sanofi-Aventis's Plavix patent. On the plus side, we see Aventis merger synergies of $900 million for 2005, and $780 million in 2006, and we note recent positive news on Lantus, Taxotere, Accomplia and Exubera. We are cutting our target price by $2 to $44, on discounted-cash-flow and relative multiples.

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

Analyst: Gary McDaniel

Martha Stewart Living shares have risen 43% since the current upswing began on May 5. Although the company has raised the advertising outlook for its flagship twice since that date, we note that even if company expectations for a 40% increase in ad pages are realized, they would still be down 25% from 2003's levels and 49% from 2002, before Stewart's legal problems began. In 2001, Martha Stewart's peak earnings performance, the company earned just 45 cents per share. Martha Stewart is now trading at 65 times that peak, 50 times our 2007 earnings per share estimate, and 7.2 times our 2006 revenue estimate. At current share price, we would sell Martha Stewart.

Seagate Technology (STX): Reiterates 4 STARS (buy)

Analyst: Richard Stice, CFA

Seagate Technology shares are lower today, we think due to unconfirmed report by an equity analyst claiming that pricing reductions were recently implemented by disk drive makers. We are somewhat skeptical of this claim, given channel inventory levels have remained in the optimal four-to-six week range for some time. But even if a price war has begun, we think Seagate's execution, product depth and technological advantages should allow it to maintain our forecasted profitability levels. We continue our hold opinions on other drive companies, Maxtor and Western Digital.


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