Markets & Finance

S&P Keeps Hold on DreamWorks


DreamWorks Animation (DWA): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

The shares are down sharply as DreamWorks trims second-quarter guidance to a per-share loss of 7 cents to 9 cents, from breakeven, and full 2005 forecast to 80 cents to 90 cents from $1.00 to $1.25, citing higher return reserves for 2004 titles. It also discloses an informal SEC inquiry on securities trading and its first-quarter release, and said principal holders Paul Allen and David Geffen have opted to defer a $500-million secondary offering until further notice. The string of bad news was largely unexpected by us, continuing first-quarter adverse surprise from DVD returns of Shrek 2. With the added risks, we are cutting our discounted cash flow-based 12-month target price by $10, to $25.

Sprint (FON): Reiterates 4 STARS (buy)

Analyst: Ken Leon, CPA

We believe the small premium Sprint is paying for US Unwired (UNWR) in a $6.25 cash tender offer for all of US Unwired's common stock may be an indicator of what Sprint-Nextel may consider with the put option from Nextel Partners (NXTP), once the pending merger closes between Sprint and Nextel Communications (NXTL) in the third quarter, subject to approvals. Buying US Unwired for $1.3 billion, which includes $266 million of US Unwired's debt outstanding, Sprint will get an affiliate that services over 500,000 subscribers that had $408 million in revenue in 2004. The purchase should close in the third quarter, subject to approvals.

Helix Technology (HELX): Downgrading to 3 STARS (hold) from 4 STARS (buy)

Analyst: Markos Kaminis

Helix agrees to be acquired by Brooks Automation (BRKS) for a sizable premium to recent value, subject to approvals. Helix shares are up roughly 16% on the news. We view the deal as worth roughly $16.50 to Helix shareholders based on a recent valuation for Brooks. This nears our 12-month target price of $17, which is based on a blend of historical ratio comparisons. Assuming a likely consummation of the deal, any further appreciation should be largely related to the performance of Brooks. Pending customary approvals, the deal is expected to close in the fourth quarter.

Brooks Automation (BRKS): Maintains 4 STARS (buy)

Analyst: Colin McArdle

Subject to the usual approvals, Brooks agrees to acquire Helix Technology via a swap of 1.11 Brooks shares per Helix share, a premium of approximately 25% based on Friday's closing prices, and a total deal value of about $454 million. We believe the significant premium is justified by our view of product synergies and our estimate of as much $20 million in annual cost savings, though we would note integration risks. Brooks also modestly lowers June-quarter revenue to $111 million to $113 million from a previous forecast of $115 million to $120 million. We have cut our fiscal year 2005 (September) earnings per share estimate to 30 cents from 39 cents.

Note: An earlier version of this article incorrectly gave Brooks' investment ranking as 5 STARS.

Lions Gate Entertainment (LGF): Downgrading to 3 STARS (hold) from 4 STARS (buy)

Analyst: William Mack, CFA

Disappointing recent theatrical releases from Lions Gate Films, such as for High Tension, as well as evidence of an increasingly promotional DVD environment, suggests to us the need for a more cautious posture toward the stock. We are trimming our fiscal year 2006 (March) EPS projection to 30 cents from 40 cents and lowering our free cash flow forecast to less than $80 million, from about $90 million. As a result, we are reducing our 12-month target price to $11 from $13, still derived by applying a 16 multiple to free cash flow but now based on this lower estimate.

Andrx (ADRX): Upgrading to 4 STARS (buy) from 3 STARS (hold)

Analyst: Herman Saftlas

We think Andrx is well positioned for the boom year we see for generics in 2006. We believe it is distinguished from its rivals by its 15 different control-release technologies, 28 marketed products, and 30 ANDAs now under FDA review. Key pipeline products include generics of Concerta, Zithromax, and Biaxin. We also like its distribution business, where an 18% gross margin towers above rivals. Margins are also benefiting from divestiture of unprofitable branded unit. Our 12-month target price remains $26, using a peer p-e 18.5 times our 2006 EPS estimate, raised by 5 cents to $1.40.

eBay (EBAY): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

eBay launches PayPal China. We had expected this introduction later this year, and view the accelerated timing as a positive. PayPal China is being offered as a free service, but we think it should enhance transaction velocity. China is a very important market for eBay, and think it faces notable competition from Taobao and its associated AliPay payment service that debuted in October 2003, because of Taobao's free offerings, substantial base of users and transactions, and considerable financial resources. Our 12-month discounted cash flow-based target price for eBay remains $36.


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