Markets & Finance

S&P Keeps Buy on Time Warner


Time Warner (TWX): Reiterates 4 STARS (buy)

Analyst: Tuna Amobi, CPA, CFA

Before 25 cents net one-time charges including a $3 billion legal settlement reserve, second-quarter earnings per share of 18 cents, vs. 19 cents, meets our estimate. Revenues and adjusted EBITDA dipped 1% and 3%, as tough film comps, network program costs, AOL customer erosion and print start-up losses outweighed higher cable subscriptions, online ads, and AOL cost control. Results seem a bit mixed to us. But after Time Warner comments in the second-quarter call, we see a much better second half as the company reiterates 2005 forecast of high single-digit EBITDA rise. With sizable financial flexibility, we see new $5 billion 2-year stock buyback as positive.

Reebok (RBK): Downgrading to 3 STARS (hold) from 4 STARS (buy)

Analyst: Marie Driscoll, CFA

The proposed combination of Adidas and Reebok is subject to EU, U.S. and other regulatory approvals, with closing anticipated in the first half of 2006. We see no reason for regulators not to approve the deal, given the inherent fragmentation of the apparel and footwear industries worldwide. Pro forma U.S. market share of athletic shoes for the combined company would be about 20%, half of Nike's (NKE) 40%, which we believe retains the competitive advantage. Meanwhile, we expect Reebok to stick to business as planned and to execute its pull-demand strategy first communicated in June.

Noble Energy (NBL): Downgrading to 3 STARS (hold) from 4 STARS (buy)

Analyst: Charles LaPorta

Noble Energy posts second-quarter earnings per share of $1.87, vs. $1.20, above our estimate of $1.70. The second quarter included 45 days of Patina Oil & Gas operations. While production and hydrocarbon prices came in above our estimates, Noble Energy's comments on the second half cause us to reduce our production expectations and slightly increase per-unit operating costs. We are lowering our 2005 and 2006 EPS estimates to $8.80 and $10.20, from $9.11 and $10.35. Given our view of superior management, we think the stock deserves a premium valuation. We are boosting our target price by $3 to $93, reflecting a 6 ratio of enterprise value to EBITDA.

Liberty Media (L): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

Liberty Media says President and CEO R. Bennett will retire Apr. 1, 2006, but remain on the board, and retain President/director posts at the recently spun off Discovery Holding. Chairman John Malone will be CEO pending the successor. We think the surprise news underscores challenges ahead as Liberty Media pursues its core strategy to "disaggregate and consolidate." Absent more detail, the news may also suggest an imminent turn on talks with News Corp. (NWS

and NWSA) to unwind its 18% voting stake, or it may signal that Discovery Holding is moving to reposition itself in a rapidly changing landscape.

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

Analyst: Tuna Amobi, CPA, CFA

In line with guidance, we are raising our 2005 outlook to 1.8 million net adds, reaching over 3 million total subscribers and possibly topping 5.2 million in 2006. Our updated model reflects declines in subscriber acquisition costs, stable churn, and slightly lower average revenue per user (ARPU) on more subscribers under discounted and multi-year plans. Shares could gain from higher anticipation of Howard Stern's arrival in January, which we think will attract new subscribers and help jump-start dual ad revenue streams. Our target price rises by $1.50 to $8, assuming positive free cash in early 2008.

RealNetworks (RNWK): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

RealNetworks posts earnings per share of 3 cents, after antitrust litigation expenses of 3 cents, vs. a per-share loss of 3 cents, 2 cents above our estimate. Revenues rose 26% on strength in consumer offerings. Notable, in our view, were the 61% gain in music revenues despite Yahoo's launch of a competing service mid-quarter, and a 22% increase in advertising-type revenues largely related to RealNetworks's bundling of Google Toolbars. Although RealNetworks raises its EPS guidance for 2005, our estimate of 7 cents and our discounted cash flow-based 12-month target of $6.50 are unchanged. We think RealNetworks faces sizable competitive challenges.

Watts Water Technologies (WTS): Downgrades to 3 STARS (hold) from 5 STARS (strong buy)

Analyst: Stewart Scharf

Second-quarter earnings per share of 44 cents before 2 cents in charges, vs. 44 cents before a 1 cent charge, is 4 cents below our estimate. Sales rose 10% (6% organic) on strength in North American wholesale and home improvement markets. We forecast high-single digit 2005 internal growth, but see soft sales in Europe and expect Watts to try to recover a greater portion of rising raw material costs via cost cuts and higher selling prices. Watts is priced above peers, at nearly 21 times our $1.75 2005 estimate, cut by 10 cents today. Applying a high average historical p-e to our 2005 estimate reduces our 12-month target price by $4 to $37.


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