Markets & Finance

S&P: Microsoft Still a Strong Buy


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

Analyst: Jonathan Rudy, CFA

September quarter earnings per share of 29 cents vs. 23 cents, after a 2 cents settlement charge and equity compensation expense, is 2 cents better than our estimate. Revenues of $9.74 billion were slightly below our $9.83 billion forecast. Microsoft noted particular strength in its Server and Tools segment, with 13% growth. To reflect equity compensation expensing, our fiscal year 2006 (ending June) and fiscal year 2007 earnings per share estimates fall to $1.31 and $1.46, from $1.44 and $1.59. With over $40 billion in cash and short-term investments, and notably higher earnings quality than peers, in our view, we would buy the stock, with shares trading at discount to peers on p-e and p-e-to-growth.

Raymond James Financial (RJF) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Robert Hansen, CFA

Our downgrade is based on valuation. Raymond James Financial posted September quarter earnings per share of 59 cents vs. 41 cents, above our 49 cents estimate. The company benefited from higher client trading volumes, increased investment banking activity and a rise in assets under management. We see these trends continuing, although with seasonal volatility, as well as productivity improvements in fiscal year 2006 (ending September). We are raising our fiscal year 2006 earnings per share estimate to $2.30 from $2.20, and see fiscal year 2007 earnings per share of $2.70. Our target price stays $36, about 13 times our fiscal year 2007 estimate. We like Raymond James Financial's competitive position, but now view shares' valuation as appropriate.

Apache (APA) : Ups to 5 STARS (strong buy) from 4 STARS (buy)

Analyst: Charles LaPorta

Third quarter operating earnings per share of $2.08 vs. $1.31 falls below our $2.47 estimate owing to hurricane-affected production. Apache expects Gulf production to fall another 25,000 BOE per day sequentially in the fourth quarter. Apache is insured for property damage; business interruption insurance kicks in 10/29. The Gulf of Mexico represents just 21% of total production. Other regions are growing; we see a 7% volume rise in 2006. We are cutting 2005 and 2006 earnings per share estimates to $8.05 and $8.65, from $8.80 and $9.50, respectively. We cut our target price by $10 to $75. With the shares' 22% drop since 9/21, we find the shares very attractive.

Meadwestvaco (MWV) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Stuart Benway, CFA

Meadwestvaco posted third quarter earnings per share of 29 cents before unusual items of a penny, down 22% from a year ago and below our estimate of 35 cents. The combination of storm-related business interruptions and higher energy and raw material costs penalized profits. We expect a major cost-reduction program to bolster earnings next year, but input costs are expected to remain elevated. We are reducing our 2005 earnings per share estimate to 85 cents from $1.05 and 2006's to $1.25 from $1.40. Based on the lower 2006 earnings per share forecast, we are lowering our 12-month target price to $28 from $35.

Massey Energy (MEE) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: John F. Hingher, CFA

Massey Energy posted a per-share third quarter loss before special items of 3 cents vs. earnings per share of 3 cents and our earnings per share estimate of 12 cents. The shortfall reflects lower production than expected at Massey Energy's longwall mines, decreased productivity, and labor issues, as well as higher costs for diesel fuel, explosives, wages and benefits. Given lower productivity and rising costs, we are cutting our 2005 earnings per share estimate to 80 cents from $1.40, and 2006's to $3.50 from $4.00, and our 12-month target price to $42 from $44. Despite current operational difficulties, we are upgrading the shares, based on valuation.

International Rectifier (IRF) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Thomas Smith, CFA

International Rectifier reported September quarter pro forma earnings per share of 41 cents vs. 59 cents, which is a penny below our estimate. GAAP earnings per share, including stock option expense, is 36 cents vs. 53 cents. Revenue declined 13% year over year and 3% quarter over quarter, as previewed in the October 10 warning. Gross margin narrowed 280 basis points, and International Rectifier's guidance is 200-basis points lower for the December quarter. We think the gross margin can recover by summer 2006 from the big dip with new plant capacity. Shifting to GAAP estimates, we are reducing our fiscal year 2006 (ending June) earnings per share estimate to $1.67 from $2.05, and fiscal year 2007 to $2.30 from $2.50. Our 12-month target price remains $32.

Vulcan Materials (VMC) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Leo Larkin

Our upgrade is based on valuation. Vulcan Materials posted third quarter earnings per share of $1.23 vs. earnings per share of 89 cents on a 14.7% revenue gain, beating our $1.15 estimate. Shares are down sharply this morning as operating margins were flat despite higher revenue. Sharply higher energy costs and rising Selling, General and Administrative Expenses negated revenue gain. We are cutting our 2005 earnings per share estimate to $3.17 from $3.25 to account for higher energy, but maintaining our 2006 earnings per share estimate of $3.60 as we see higher product prices and rising volume offsetting increased energy. We are maintaining our 12-month target price of $76.

Bristol-Myers Squibb (BMY) : Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Herman Saftlas

Bristol-Myers Squibb posted third quarter operating earnings per share of 31 cents vs. 44 cents, 4 cents below our estimate. While we see growth in newer lines such as Abilify and Reyataz, we think worsening exclusivity losses (including Pravachol) will result in an 11% earnings per share decline in 2006 to $1.25 (after 6 cents in options expense). We see more pipeline holes, with likely termination of Pargluva diabetes drug. And we are now less confident of the $1.12 dividend, given the indicated high payout ratio and generic threat to Plavix. We are lowering our 12-month target price by $10 to $17, which applies peer p-e of 14 times to our 2006 estimate.


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