Markets & Finance

S&P Upgrades Pixar to Buy


Pixar (PIXR): Raised to 4 STARS (buy) from 3 STARS (hold)

Analyst: Tuna Amobi, CPA and CFA

After Pixar shares dropped 16% in the last two months on adverse second quarter surprises related to The Incredibles DVDs, we now see an attractive risk/reward profile for the company. Its 2005 catalysts may include a new distribution deal, which admittedly also adds to near-term uncertainty. Our outlook assumes no major downturn in computer-generated films, which we think are somewhat insulated from higher competition for DVD shelf space. Our discounted cash flow-based target price stays at $50, with a sizable p-e premium to animation peer Dreamworks (DWA).

Sprint Nextel (S): Maintains 4 STARS (buy)

Analysts: Ken Leon, CPA and Todd Rosenbluth

Continuing its trend of acquiring affiliates, Sprint Nextel agrees to purchase two more small carriers today, pending necessary approvals. The combined transactions should add more than 300,000 subscribers to the newly combined national carrier. While the planned deals are valued at enterprise value-to-forward earnings before interest taxes depreciation and amortization multiples above 8, higher than current multiples for larger carriers, we believe the planned transactions will add needed scale as Sprint Nextel competes with Verizon Wireless and Cingular. We remain positive on Sprint Nextel's fundamental outlook and believe the shares remain undervalued.

Martha Stewart Living (MSO): Reiterates 1 STAR (strong sell)

Analyst: Gary McDaniel

Martha Stewart Living magazine will restate its circulation figures for 2003, according to a report in Ad Age. Martha Stewart Living says the Audit Bureau of Circulation will revise the magazine's audit to remove sales by Ebsco, which was found to be distributing magazines for free that had been included in paid circulation totals. This will reduce previously reported circulation by 1.8%; in 2003 the magazine surpassed its guaranteed rate base by just 1.1% on average, meaning that the restatement could result in payments or in-kind compensation to advertisers.

QLogic (QLGC): Reiterates 4 STARS (buy)

Analyst: Richard Stice, CFA

QLogic agrees to sell its hard disk and tape drive controller businesses to Marvell Technology (MRVL) for $225 million. The transaction is expected to close within 60 days, pending necessary approvals. We are encouraged by the action, since we believe it will improve QLogic's visibility and create a more focused business model. We also anticipate that future results will benefit from a newly announced share repurchase program of up to $350 million. Our 12-month target price of $41, raised today from $38, is based on updated relative p-e and discounted cash flow valuation metrics.

Marvell Technology (MRVL): Reiterates 5 STARS (strong buy)

Analyst: Amrit Tewary

Marvell plans to acquire the hard disk and tape drive controller business of QLogic for $180 million in cash and $45 million in stock. We think the deal makes strategic sense for Marvell, as it complements its existing product portfolio. The transaction, subject to approvals, is expected to close within 60 days and be accretive to earnings per share. Based on the sales and operating margin profile of the business to be acquired, we estimate that the deal, if completed, would add about 3 cents per quarter to Marvell's operating EPS. We will revisit our EPS estimates upon consummation of the deal.

Action Performance Companies (ATN): Maintains 3 STARS (hold)

Analyst: Amy Glynn, CFA

Action Performance agreed to be acquired by Motorsports Authentics, a venture of International Speedway and Speedway Motorsports, for $13 per share cash. At an 8% premium to yesterday's closing price, the deal represents a price-to-sales multiple on estimated fiscal year 2005 (ending Sept.) sales of 0.8 times, which is a discount to Action Performance's 5 year average. Yet, we note that Action Performance has been struggling to turn around its operations and we see this discount as warranted. Subject to necessary approvals, the deal is expected to close late in 2005. On terms of the deal, our target price rises to $13 from $12.

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

Analyst: Tuna Amobi, CPA and CFA

Time Warner shares are up in afternoon trading on an unconfirmed Bloomberg story that the financier Carl Icahn, together with hedge funds, is mulling a tender for up to 10% of Time Warner. With the group's reported combined 2.6% stake in Time Warner, we calculate that it would require at least a hefty $7 billion to realize that aim, which seems like a long-term uphill task and might still fall short of providing leverage for an unlikely proxy fight at Time Warner. But after reports of Icahn's amiable recent meeting with Time Warner's CEO Richard Parsons, headlines could ultimately lead Time Warner to hasten shareholder return initiatives, among other things.

Golden West Financial (GDW): Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: Jason Seo, CFA

Our upgrade is based primarily on valuation. We continue to believe that Golden West Financial's balance sheet, with its large portfolio of adjustable rate mortgages (ARMs) that reprice on a monthly basis, will provide some protection from rising short-term rates. In addition, we think the company's solid underwriting standards will mitigate investor concerns about potential credit risk related to non-traditional mortgages. With the lowest efficiency ratio among its peers and a diversified deposit base, we see Golden West Financial as a well-managed firm with exposure to attractive markets. Our 12-month target price remains $70.

Four Seasons Hotels (FS): Cut to 3 STARS (hold) from 5 STARS (strong buy)

Analyst: William Mack, CFA

We think that the probability of an upside surprise in demand for lodging at Four Seasons' hotels over the rest of 2005 has fallen, and that recent long-term management contract terminations reduce the predictability of its free cash flows through 2010. We are lowering our 2005 earnings per share estimates by 5 cents, while increasing our 2006 estimates by the same amount. This brings our new forecasts to $1.37 and $1.65. We are also lowering our target price on the company to $69 from $85, based on discounted cash flow methodology, since we now discount free cash flows to 2010 by a higher rate and cut our terminal value multiple to 25 times from 33 times.


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