Markets & Finance

S&P Downgrades GM But Ups CSC and Siemens


General Motors (GM) : Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Efraim Levy, CFA

GM announced added details of capacity reductions. However, the incremental reduction of 5,000 more hourly positions, which we estimate will yield 70 cents annual savings when fully implemented by 2008, does not go far enough or soon enough in our view, and the costs of a buyout will precede the savings. However, GM expects a total $1 billion annual cost savings beginning in 2007. If achieved, we believe this could add $1.40 to earnings per share. However, not all the gains may be achieved, and there could be offsetting higher other costs. Above our 12-month target price of $22, we would sell GM shares.

Computer Sciences (CSC) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Dylan Cathers

CSC shares are down over 12% this morning after an unconfirmed report in Saturday's Wall Street Journal stated that Lockheed Martin (LMT) and three private-equity firms have broken off talks to buy CSC. The potential deal was valued at $65 a share. All of the parties involved have declined to comment. We believe that this morning's decline in CSC shares presents an attractive entry point, based on our revenue and earnings per share growth expectations for the company. Our target price is $60.

Siemens (SI) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Stewart Scharf

We expect fiscaly year 2006 (ending September) revenues to advance at least 5%, with half due to organic growth, as strength led by power generation and automation and drives offsets weak demand for communications and computer services. We expect margins to widen modestly as Siemens targets staff cuts, including 3,000 positions from the computer unit. Shares were recently trading at 15.5 times our fiscal year 2006 earnings estimate of $4.94 per American Depositary Share, slighty below historical levels and the Euro 350 Index. Our 12-month target price rises by $13 to $82.

Odyssey Healthcare (ODSY) : Ups to 3 STARS (hold) from 1 STAR (strong sell)

Analyst: Cameron Lavey

Our upgrade is based on what we see as improving conditions in the hospice industry, including rising reimbursement rates. We expect the company to continue to post mid-single digit increases in average daily census while working to reduce its overall Medicare cap exposure. We see some risk in shares because of a Justice Department investigation, but we think Odyssey is fairly priced at current levels. Our 2005 earnings per share estimate is 80 cents, and 2006's is 76 cents after projected 8 cents option expense. We are raising our 12-month target price by $7 to $19, 25 times our 2006 earnings per share estimate and slightly above peers.

Alvarion (ALVR) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Ari Bensinger

Shares are nearing our 12-month target price of $10. Given its time-to-market advantage, we think Alvarion is well positioned to benefit from a growing interest for the nacsent Wi-MAX technology. However, we believe that Wi-MAX faces considerable hurdles ahead, such as product certification and spectrum allocations. We advise holding but not adding to positions.

Level 3 (LVLT) : Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Todd Rosenbluth

Level 3 shares were up more than 30% for November, after the company's announcement of its planned purchase of WilTel Communications on 10/31, pending approvals. We think the deal reduces some liquidity risk we see for Level 3; its forward earnings before interest taxes depreciation and amortization, or EBITDA, interest coverage ratio is well below peers. Given our view that Level 3's legacy services will continue to decline and that prospects are dependent on the uncertain success of VoIP products, we see Level 3 as overvalued. Our target price is $3.


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