Markets & Finance

S&P Cuts Pixar to Hold


Pixar (PIXR): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Tuna Amobi, CPA, CFA

Shares were off 12% today as Pixar cut second-quarter earnings per share guidance by 5 cents to 10 cents, with an updated home video sell-through of "The Incredibles." This was a mild surprise to us, as "The Incredibles" DVD sales seemed to track strong. We think the news underscores rising genre competition in CGI animation, as Dreamworks also blamed its first-quarter miss on "Shrek 2" DVD returns. CEO Steve Jobs will lead a 1:30 p.m. call on this latest news. With no slated 2005 theatrical release and a new distribution deal pending, we are lowering our target price by $15 to $50, on blended discounted-cash-flow and relative p-e.

Microsoft (MSFT): Reiterates 5 STARS (strong buy)

Analyst: Megan Graham-Hackett, Jonathan Rudy, CFA

Microsoft has agreed to pay International Business Machines $775 million to settle antitrust claims relating to the federal government's antitrust case against Microsoft in the mid-'90s. The judge found that IBM was negatively impacted by Microsoft's practices, involving IBM's OS/2 software as well as other areas. Microsoft will also extend a $75 million credit to IBM for Microsoft products. We view this move as positive and note that Microsoft has been using its substantial cash balance to resolve a number of outstanding legal issues during the past year.

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

Analyst: Megan Graham-Hackett

We view as positive the disclosure from Microsoft that it has entered into an agreement with IBM to resolve antitrust issues. Under terms of the settlement, Microsoft will pay IBM $775 million and extend $75 million in credit towards deployment of Microsoft software at IBM. The dispute was related to Microsoft's practices regarding IBM's OS/2 operating system, among other issues. We believe IBM will likely use the cash for stock buybacks, and small acquisitions. We are making no change to our estimates. At a price/sales of 1.2 times, in line with peer average, we view IBM as fairly valued.

Pfizer (PFE): Reiterates 3 STARS (hold)

Analyst: Herman Saftlas

Pfizer removes capravarine for HIV/AIDS and Daxas for chronic obstructive pulmonary disease from its pipeline after they failed to show significant benefits. While we did not see these drugs as potential first tier blockbusters, their termination underscores pipeline risks for Pfizer, which we think needs a lineup of new blockbusters to offset COX-2 losses and patent expirations. We are reiterating our 12-month target price of $29, which applies a discount-to-peers 13.3 times p-e to our 2006 earnings per share estimate. We think the discount is fair based on our view of pipeline and Lipitor litigation risks.

Sabre Holdings (TSG): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Sabre preannounced lower second-quarter earnings per share than it had previously expected, reflecting disappointing growth in its Sabre travel network segment and charges related to a newly announced headcount reduction in its product and system delivery group. Accordingly, we are cutting our adjusted second-quarter earnings per share forecast to 40 cents from 45 cents. However, we are leaving our 2005 estimate at $1.50, which is at the low end of Sabre's indicated guidance. We continue to believe Sabre faces notable competitive challenges, but with a p-e of 13, below the S&P 500, we believe Sabre's share price already reflects this.

priceline.com (PCLN): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Yesterday priceline.com announced that, as of January 2006, it would become the exclusive provider of opaque travel services to Orbitz, which is owned by Cendant (CD). Priceline.com's Travelweb unit will also now allow Orbitz to pursue direct relationships with certain affiliated hotels. We think this agreement makes sense for priceline.com, and offers the potential for opportunities with Cendant properties in addition to Orbitz, including CheapTickets and ebookers. Our estimates are unchanged, and our 12-month target price for priceline.com remains $25, based on intrinsic and relative analyses.

Pitney Bowes (PBI): Reiterates 4 STARS (buy)

Analyst: Megan Graham-Hackett

Pitney Bowes announced it has acquired all the stock of Danka Canada in a move that we believe boosts Pitney Bowes's geographic coverage and direct sales capabilities. Danka Canada is a leading provider of office systems services supplies and equipment in Canada. Based on Danka Canada's most recent fiscal year revenues of $36 million, we view the purchase price of $14 million, or 0.4 times, as reasonable, given peers' range. There is no change to our 2005 earnings per share estimate of $2.70. At 16 times our 2005 estimate, the shares are at a discount to historical range, and with, in our view, solid free cash flow, we see Pitney Bowes as attractive.


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