Markets & Finance

S&P Boosts Electronic Arts to Buy


Electronic Arts (ERTS): Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: Jonathan Rudy, CFA

Following a recent decline, we believe shares of this market-leading video game provider have reached attractive valuation levels. We expect Electronic Arts will benefit significantly from the buildout of next-generation hardware consoles, with the X-Box 360 expected to launch on Nov. 22, and PlayStation 3 anticipated to launch next spring. Additionally, with strong franchises such as Madden NFL Football, FIFA, James Bond, Harry Potter, and Tiger Woods Golf, we believe the company has the most diversified brand library in the industry. Our 12-month target price remains $60.

Delphi (DPH) : Drops analytical coverage

Analyst: Efraim Levy, CFA

Delphi filed for Chapter 11 bankruptcy protection Saturday, October 8. The company was unable to get the concessions that it believed it needed from General Motors (GM) or the United Auto Workers union. We believe that Delphi chose to file now so as to be ahead of the changes in bankruptcy rules that are scheduled to take effect after October 17, 2005; rule changes that we consider to be less favorable to debtors. We previously had a hold recommendation on Delphi shares.

General Motors (GM) : Reiterates 1 STAR (strong sell)

Analyst: Efraim Levy, CFA

We do not expect Delphi's bankruptcy filing to disrupt its auto parts supplied to General Motors in the near term. But given the dramatic salary and benefit cuts that Delphi seeks from its unionized employees, we see the potential for a disruptive strike in the future. Under the terms of General Motors's spinoff of Delphi, General Motors is responsible for the pension and healthcare obligations related to some Delphi employees. While General Motors's obligations are hard to quantify, we believe they could run into the billions of dollars, and we estimate that each $100 million of pretax expense costs General Motors about 15 cents per share.

Allianz (AZ): Upgrades ADSs to 4 STARS (buy) from 3 STARS (hold)

Analyst: D. Chambers

In our view, the company's main driver of operating profit

is the property-casualty business, which accounted for over 70% of operating profit in the first half of 2005, excluding the negative effect of holding company activities. Allianz has begun to integrate various businesses, and we think this may allow it to accelerate top-line growth. We are increasing our 2005 earnings per ADS estimate to $1.33 from $1.12 and 2006's to $1.39 from $1.18. We are raising our target price

by $2 to $15 based on our blended relative valuation model, assuming return on equity of 12.5% and a nominal growth rate of 3%.

Cable & Wireless (CWP): Reiterates 3 STARS (hold)

Analyst: Todd Rosenbluth

Following the company's announcement last week that its U.K. operations continue to be pressured by pricing and by technology substitution, and with a delay in cost-cutting initiatives, we are lowering our estimate for 2005 operating earnings per ADS by 11 cents, to 41 cents. We had previously believed that the company's restructuring efforts were progressing nicely. While we view as positive that Caribbean operations are performing in line with company expectations, we are lowering our relative p-e-based target price to $6.50, from $8, based on our estimate revisions.

Fannie Mae (FNM) : Reiterates 3 STARS (hold) Opinion

Analyst: Jason Seo, CFA

Fannie Mae expects its third quarter after-tax losses due to Hurricanes Katrina and Rita will be in the range of $250 million to $550 million. Although we continue to view positively Fannie Mae's improving capital position, which we believe has met the regulatory requirements of a 30% capital surplus over its minimum requirement as of Sept. 30, we remain concerned about limited earnings visibility and the final outcome of pending government-sponsored enterprise legislation. Our 12-month target price remains $50.

Sun Communities (SUI) : Cuts to2 STARS (sell) from 3 STARS (hold)

Analyst: Scott Hoina, CFA

Despite an 18% decline in the shares so far in 2005, we see further downside, based on our expectations of continued weak industry fundamentals and the overhang from the Securities and Exchange Commission's investigation into accounting practices with respect to Sun Communities's SunChamp joint venture. Sun Communities has an above-average dividend yield, but with a 112% adjusted funds from operations payout ratio compared with a 90% industry average, we see limited potential dividend growth. We are lowering our target price to $29, from $33, or to 10.5 times our $2.85 estimate of 2006 funds from operation per share, below the 13 times peer group average.

Electronic Arts (ERTS) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Jonathan Rudy, CFA

Following a recent decline, we believe shares of this market-leading video game provider have reached attractive valuation levels. We expect Electronic Arts will benefit significantly from the buildout of next-generation hardware consoles, with the X-Box 360 expected to launch on Nov. 22, and PlayStation 3 anticipated to launch next spring. Additionally, with strong franchises such as Madden NFL Football, FIFA, James Bond, Harry Potter, and Tiger Woods Golf, we believe Electronic Arts has the most diversified brand library in the industry. Our 12-month target price remains $60.

Cable & Wireless (CWP) : Maintains 3 STARS (hold)

Analyst: Todd Rosenbluth

Following the company's announcement last week that its U.K. operations continue to be pressured by pricing and by technology substitution, and with a delay in cost-cutting initiatives, we are lowering our estimate for 2005 operating earnings per American Depositary Share by 11 cents, to 41 cents. We had previously believed that the company's restructuring efforts were progressing nicely. While we view as positive that Caribbean operations are performing in line with company expectations, we are lowering our relative p-e-based target price to $6.50, from $8, based on our estimate revisions.

Allianz (AZ) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Derek Chambers

In our view, Allianz's main driver of operating profit is the property-casualty business, which accounted for over 70% of operating profit in the first half of 2005 excluding the negative effect of holding company activities. Allianz has begun to integrate various businesses, and we think this may allow it to accelerate top-line growth. We are increasing our 2005 earnings per American Depositary Share estimate to $1.33 from $1.12, and 2006's to $1.39 from $1.18. We are raising our target price by $2 to $15 based on our blended relative valuation model, assuming return on equity of 12.5% and a nominal growth rate of 3%.


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