Markets & Finance

S&P Keeps Strong Sell on Sony


Sony (SNE): Reiterates 1 STAR (strong sell)

Analyst: John Yang

After Sony's move to partly refinance $1.1 billion of bonds under a $2.7 billion shelf registration, we see liquidity challenges as it aims to transform itself with capital-intensive chip investments. With fiscal 2005 (ended March) cash of about $7.3 billion, and free cash flow of $2.7 billion, we don't think Sony can sustain cash outflows needed to expand its chip business, as competitors like Intel and Samsung spend about $4 billion on capital expenditures per year. As we see a likely cash crunch and profit deterioration on higher depreciation, our target price stays $27 on relative price-to-book value and enterprise value-to-EBITDA analyses.

Michaels Stores (MIK): Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analyst: Michael Souers

Following the retailer's nearly 15% drop in stock price over the past month, we now view the shares as appropriately valued. Michaels continues to execute formidably and has favorable demographic trends working for it long term, in our view. With the recent pullback in price, the shares trade at about 17 times our fiscal 2007 (ending January) Core EPS estimate of $2.08, in line with the S&P Midcap 400. While we remain skeptical that the company will meet its comparable-store sales guidance for the January quarter, we believe the overall positives of the company now warrant a hold recommendation. Our target price remains $37.

Barr Pharmaceuticals (BRL): Reiterates 4 STARS (buy)

Analyst: Herman Saftlas

The FDA continues to evade a decision on the OTC status of Barr's prescription Plan B "morning after" contraceptive pill. The agency plans to seek further public opinion on the feasibility of allowing OTC status for women 17 and older, but restricting pill to prescription-only for girls under 17. In view of these delays, we are reducing our fiscal 2006 (ending June) EPS estimate by 2 cents to $2.83. On the plus side, we still view Barr as a leader in the generics segment, with some 35 ANDAs pending FDA review. Our 12-month target price remains $55, which applies a peer p-e ratio of 19 times to our fiscal 2006 estimate.


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