Standard & Poor's believes equity investors will take a less defensive tack and favor more growth-oriented issues during the second half of this year. This results from the recent market resilience after the London bombings and rising consumer confidence and spending -- and despite $60 oil.
Also, investors have seen fewer second-quarter negative earnings preannouncements than originally expected and have received some reassuring data on inflation. Adding to our outlook are a favorable employment backdrop and our projection that the Federal Reserve is nearing the end of its tightening program.
The upshot? We've raised our recommended sector weightings on the Information Technology and Consumer Discretionary sectors to overweight from underweight, and Financials to marketweight from underweight.
However, with the lowered emphasis on defensive issues, we have reduced our sector weightings on Consumer Staples to underweight from overweight, and Health Care and Utilities to marketweight from overweight.Apple Computer (AAPL
): Reiterates 3 STARS (hold)
Analyst: Megan Graham-Hackett
June-quarter earnings per share of 37 cents, vs. 8 cents, beat our 28-cents estimate, as gross margin was 200 basis points above our model. We believe the company's sales mix was aided by strength of Tiger OS, offsetting stronger unit growth in lower-end desktops than in laptops and lower average selling prices for iPod. Interest income accounted for 1 cent of EPS upside.
Apple guides for September-quarter EPS 1 cent above our estimate, but sees revenue flat vs. June-quarter on Intel shift, vs. the 8% rise we projected. We are upping fiscal year 2005 (September) EPS estimate by 11 cents, to $1.40. Above peers at 3 times price/sales, we would hold Apple for its cash levels and sales growth. Advanced Micro Devices (AMD
): Reiterates 3 STARS (hold)
Analyst: Amrit Tewary
AMD posts second-quarter earnings per share of 3 cents, vs. 9 cents, compared with our 3 cents loss estimate. Sales increased 3% sequentially and gross margin widened 500 basis points from the first quarter. AMD expects an above seasonal third quarter in the microprocessor business, and has been building inventory to meet anticipated demand. We still see third-quarter EPS of 11 cents on a 7% sequential sales increase and continued gross margin improvement. We are raising our 2005 EPS estimate to 30 cents, from 26 cents, and are initiating our 2006 estimate at 65 cents. We believe AMD shares are fairly valued based on our price-to-sales analysis. Genzyme (GENZ
): Reiterates 4 STARS (buy)
Analyst: Frank DiLorenzo, CFA
Second-quarter operating EPS of 57 cents, vs. 44 cents, is 2 cents above our estimate. Renagel sales of $100.8 million were $3 million below our forecast, Cerezyme's $236 million were $6 million above, and Fabrazyme's $74.4 million were in line. We are raising our 2005 EPS estimate to $2.22 from $2.18, and 2006's to $2.70 from $2.67. With peer p-e-to-growth at 1.3 times our 2006 biotech estimates, we think Genzyme deserves a slight premium on our view of product diversity, predictability, and lower risk. Assuming its p-e-to-growth trades to 1.4, using our estimates of 2006 EPS at $2.70 and EPS growth at 20.3%, our target price rises $6 to $77. Endo Pharmaceuticals (ENDP
): Upgrading to 5 STARS (strong buy) from 4 STARS (buy)
Analyst: Cameron Lavey
We think Endo's sales of generic OxyContin will provide a significant boost to revenue and earnings in the second half of 2005. In addition, we believe it has a diverse portfolio of branded and generic drugs, along with a strong pipeline of mid-to-late-stage candidates. To reflect additional upside potential from generic OxyContin, we are raising our 2005 EPS estimate by 52 cents to $1.70 and 2006's by 41 cents to $1.75, after about 8 cents in stock option expense. We are also increasing our 12-month target price, by $6 to $37, or 21 times our 2006 estimate and in line with peers. CNOOC Ltd. (CEO
) : Maintains 3 STARS (hold)
Analyst: Lorraine Tan
Market speculation reported in Bloomberg and elsewhere that CNOOC may sweeten its bid for Unocal (UCL
) by $2.5 billion. If confirmed, it supports our belief that CNOOC's current bid is not seen as enough of a premium to sway UCL shareholders, given regulatory uncertainties. While CNOOC has ample access to capital, via soft loans from its parent, a continued escalation in the UCL bid may end up raising the risk to CNOOC's future cash flow. We note upside potential from an upward relative revaluation as its asset base expands beyond China and its China-issue discount diminishes. Berkshire Hathaway (BRK.A
): Maintains 2 STARS (sell)
Analyst: Catherine Seifert
Unconfirmed Wall Street Journal reports indicate that federal prosecutors and regulators are examining whether General Re's current CEO, Joseph Brandon, played a role in the controversial 2000 reinsurance agreement with American International Group (AIG
). We think the ongoing (and possibly widening) investigation into this finite reinsurance deal continues to impose "headline risk" on shares of Berkshire. The shares currently trade at 22 times our $3900 2005 EPS estimate, a premium to both the market and its insurance peers. We do not believe this premium is warranted. Our target price stays at $80,000.