Markets & Finance

S&P Cuts Sony to Sell


Sony (SNE): Cuts to 2 STARS (sell) from 4 STARS (buy)

Analyst: John Yang

We are surprised at Sony's substantial cut in fiscal year 2006 (ending March) guidance to a net loss of about $89 million from a net income of $89 million, with nearly $1.9 billion in restructuring costs through fiscal year 2007, after $3.4 billion in the past three years. The company also indicated that fiscal year 2007 would be "challenging," with no revenue growth likely in electronics. We are cutting our fiscal year 2006 and fiscal year 2007 estimates to losses per American Depositary Receipt of 11 cents and 16 cents, respectively, from earnings of 22 cents and 23 cents. We are lowering our target price by $10 to $31, on a blend of price/book and enterprise value/earnings before interest taxes depreciation and amortization, both discounts to historical averages.

Global Signal (GSL): Starts Coverage at 3 STARS (hold)

Analyst: Kenneth Leon, CPA

We are positive on the outlook for Global Signal, which is one of the largest owners of U.S. wireless communications towers. Following a 10% revenue rise in 2004, we expect them to almost double in 2005, reflecting the $1.2 billion tower purchase from Sprint Nextel( S) that closed in May 2005. The deal boosted Global Signal's total towers owned to 10,244 sites from 2,988 before the purchase. We see an operating loss of 33 cents in 2005 and a loss of 2 cents in 2006. Our 12-month target price of $45 is based on an enterprise value of 15.1 times our 2006 earnings before interest taxes depreciation and amortization estimate, near peers.

Palm (PALM): Reiterates 3 STARS (hold)

Microsoft (MSFT): Reiterates 5 STARS (strong buy)

Analysts: Megan Graham-Hackett (Palm); Jonathan Rudy, CFA (Microsoft)

Palm announced it will be holding a press conference with Microsoft (MSFT) and Verizon's (VZ) Wireless unit. We believe Palm is going to announce a new Treo smartphone based on Microsoft's operating system, and using Verizon's high-speed wireless service.

For Palm's part, we believe such innovation is needed for the Treo platform to expand its addressable market, stave off competition, and sustain its high demand levels. However, details on pricing, etc. remain undisclosed at this time.

As for Microsoft, we think that partnerships such as this one will be critical for the company to gain leverage for this operating system, as, in our opinion, it has had some challenges in the past signing up mobile equipment and telecom partners. We believe Windows Mobile software could be an important growth driver over the long-term for Microsoft.

We plan to update following today's meeting, which begins at 12 pm EDT.


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