Markets & Finance

S&P Keeps Hold on GE


General Electric (GE): Reiterates 3 STARS (hold)

Analyst: Robert Friedman, CPA

The $165-billion in revenue industrial/financing/media giant posts second-quarter earnings per share up 22% to 44 cents, a penny above our estimate. Revenue rose 13% -- 8% from organic growth and 5% from acquisitions. We believe CEO Immelt's strategy of migration towards businesses that serve growing markets and that have enduring competitive advantages, thus allowing for high profitability, seems to be paying off. However, we think second-quarter results were also aided by comparison against a transitional second quarter of 2004. As such, and given GE's size, we think chances are low that it can post 10%-plus EPS growth on an ongoing basis.

Electronic Arts (ERTS): Reiterates 3 STARS (hold)

Analyst: Jonathan Rudy, CFA

Shares are down 5% this morning following news that the launch of the company's 'Godfather' video game will be delayed from the December quarter to March quarter in 2006. While we believe that this delay will help ensure the game's quality, we are disappointed that the launch will miss the important holiday selling season. However, with the latest versions of some of Electronic Art's most popular sports titles set for launch, such as Madden NFL 06, and the next generation of hardware consoles rapidly approaching, we believe that Electronic Arts has a number of other positive catalysts to mitigate the 'Godfather' delay.

Hewlett-Packard (HPQ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

The Wall Street Journal reported today that H-P is expected to make a major restructuring announcement on Tuesday. While we had anticipated such an announcement, we expected it to come in mid-August, when H-P is scheduled to report earnings. We believe layoffs will total some 15,000 and the focus will be in the enterprise unit, which carries lower margins than peers. We will look for details in Tuesday's announcement about savings from the restructuring and hope the rollout will be quick, with benefits by yearend. With H-Q at a price/sales of 0.9, below the peer average, we view it as worth holding.

McDonald's (MCD): Reiterates 5 STARS (strong buy)

Analyst: Dennis Milton

The fast-food chain's June same-store sales grew 5.4% year to year in the U.S. and 3.8% globally, above our estimates

of 4.4% and 2.9%. McDonald's projects June-quarter EPS of 51 cents, vs. 47 cents a year ago, in line with our estimate, excluding a one-time charge of 9 cents for repatriating foreign earnings. We are maintaining our 2005 EPS estimate

of $1.96, and our 12-month target price of $38. At 15 times our 2005 EPS estimate, McDonald's shares are at a slight discount to peers, despite the company's strong sales momentum. We expect the U.S. rollout of premium

chicken sandwiches will help sustain strong customer traffic patterns.

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

Analyst: Scott Kessler

Priceline.com preannounces second-quarter revenues and earnings per share that are lower than our forecasts. We are cutting our projections for revenues to $272 million from $268 million, and EPS to 30 cents from 34 cents. In May, priceline missed our first-quarter revenue forecast, due to challenges in its opaque air and rental car businesses. Demand and execution are now concerns for us. Priceline also announces the completed acquisition of Amsterdam-based Bookings B.V., an online provider of European hotel reservation services, for $133 million. We expect Bookings to add 4 cents to priceline's second-half EPS, thus leaving intact our 2005 estimate of $1.22.

Hovnanian Enterprises (HOV): Keeps 4 STARS (buy)

Analyst: William Mack, CFA

We think ongoing interest-rate-friendly economic data will limit any foreseeable increases in mortgage rates, and we see improved visibility into next year as 2006 approaches. We expect benefits to accrue to most builders, pushing the group's average earnings multiple to nearly 9 times 2006 estimates by yearend. Moreover, we still believe Hovnanian, given its favorable projected growth rate, deserves a modest premium to this anticipated average p-e. Thus, we are raising our 12-month target price to $85 from $73, about a 9.5 p-e applied to fiscal year 2006 (October) EPS we still see at $8.85.

Chesapeake Energy (CHK): Maintains 5 STARS (strong buy)

Analyst: Charles LaPorta

In our view, Chesapeake Energy remains one of the most aggressive growers in the onshore exploration and production sector, continues to be innovative in finding or acquiring reserves at economic prices, and demonstrably creates value by achieving above-average natural gas price realizations through its hedging program. We are increasing our 2005 and 2006 EPS estimates to $2.15 and $2.30, from $2.03 and $2.15. We are raising our target price by $3 to $30, reflecting a premium p-e of 14 times our 2005 EPS estimate, and a premium enterprise value at 5.8 times our estimate of 2005 EBITDA.


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