Markets & Finance

S&P: Buy Shell and Playboy, but Sell Nortel


Royal Dutch Shell(RD) : Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: Tina Vital

While over half of Shell's 450,000 barrel-of-oil equivalent net Gulf production remains shut in, 150,000 boe/d is expected to be restored during the fourth quarter, and its Motiva refinery at Port Arthur, Tex. has restarted. High oil and gas prices and strong refinery margins boosted its third quarter operating earnings by 72% to $7.51 billion, beating our estimate by $1.52 billion. We are raising our 2005 earnings per ADS estimate by 77 cents to $7.54

and our 2006 forecast by $1.76 to $8.41. A blend of our

discounted cash-flow and peer multiples leads us to raise our 12-month target price by $5 to $73, an enterprise value of 5 times our 2005 EBITDA estimate, in line with peers.

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

Analyst: Tuna Amobi, CPA, CFA

Time Warner, in its third quarter conference call, affirmed its key priorities: closing the Adelphia acquisition in the 2006 first half, stepping up return of capital, and repositioning AOL. CEO Richard Parsons also confirmed widely

reported AOL talks with potential suitors, without further specifics. With $12.4 billion in net debt at the end of the third quarter and estimated $5 billion-plus annual free cash, vs. a $9.2 billion Adelphia cash commitment and $2.4 billion post-Q3 outflow on government settlement, we think Time Warner could double its debt capacity to fund a boosted

$12.5 billion stock buyback, and keep its investment-grade credit rating, with room for relatively modest new acquisitions. Our target price stays at $22.

Comcast(CMCSA), Time Warner(TWX), and Cox and Newhouse : Comments on Wireless Pact with Sprint Nextel(S)

Analyst: Tuna Amobi, CPA, CFA

Comcast, Time Warner, and the private company Cox and Newhouse announced a pact with Sprint Nextel for co-branded wireless service starting in 2006. The two-year deal involves an initial $200 million, split evenly between the cablers and Sprint. The news was expected, and should foster TV, broadband, and voice convergence. Integrated quad-play could provide cablers with competitive counterpunch over time; more cablers will likely join. Despite the assertion by the parties involved, it is not yet clear that cable would reap substantially better or full economics compared with traditional reseller arrangements.

Nortel Networks (NT): Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Kenneth Leon, CPA

Third quarter results of breakeven vs. 6 cents loss, before special items, is 3 cents below our estimate. A 7% sales decline quarter over quarter is due to a sharp drop in wireless network demand, in our view. While Nortel sees 13% sales growth for 2005, we forecast 4% to 7% growth in 2006 and 2007. We are less than optimistic that Nortel will regain wireless sales growth; thus, we see more pressure on its fixed-line unit. We are lowering our 2005 earnings per share estimate to 6 cents from 8 cents but maintaining our 2006 estimate of 15 cents. With concerns about a weak first half 2006, we are lowering our 12-month target price to $3 from $3.50.

Mercury Interactive (MERQE) : Cuts to TO 2 STARS (sell) from 3 STARS (hold)

Analyst: Zaineb Bokhari

Mercury Interactive's CEO, CFO and General Counsel resigned after an internal investigation into past option grants which determines that internal and accounting controls over these grants were inadequate. According to the investigation, these senior executives were aware of and benefited from this. Mercury Interactive sees third quarter revenues of $205 million to $210 million, above 10/4 guidance of $198 million to $203 million, but no other financial metrics were given. Given financial uncertainty and the Securities and Exchange Commission investigation, we are placing our estimates under review. We are concerned by what we see as potential for widening of the scope of the SEC's investigation.

Playboy Enterprisess (PLA): Keeps 4 STARS (buy)

Analyst: J. Peters, CFA

Playboy posted third quarter EPS of 10 cents, vs. 6 cents one yearearlier, 2 cents better than our estimate, partly on a lower-than-expected tax rate that we do not expect will be repeated. Revenues rose fractionally, with a 7.5% decline in publishing revenues offset by gains in licensing and entertainment. With our expectation of continued advertising declines in the publishing division, we are lowering our 2005 EPS estimate by 3 cents to 57 cents. However, we think

Playboy's multifaceted brand-leveraging strategy will pay off with higher revenue growth in 2006, and we are raising our 12-month target price to $16 from $15.


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