Markets & Finance

S&P Ups Texas Instruments, NEC, Coventry Health


Texas Instruments (TXN): Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Thomas Smith, CFA

Texas Instruments narrowed its revenue guidance toward the top of its prior range and raised its fourth quarter earnings per share outlook by 2 cents to between 38 cents and 40 cents, including stock option expense. Verbal comments describe lean chip inventory conditions and stable order lead times, which we view as conducive to growth in 2006. We are raising our earnings per share estimates (including expected option expense) to $1.40 from $1.38 for 2005, and to $1.75 from $1.65 for 2006. We are also increasing our 12-month target price by $2 to $40.

Hovnanian Enterprises (HOV): Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: William Mack, CFA

Hovnanian Enterprises posted October quarter earnings per share of $2.53 vs. $2.06. Although this matches our $2.53 estimate, an unexpected jump in high-margin land sales made up for underperformance in the company's core homebuilding operations. We are trimming our fiscal year 2006 (ending October) earnings per share estimate by 10 cents to $8.50 based on early evidence that the year has begun more slowly than we had thought. We are lowering our target price to $44 from $54.

McDonald's (MCD): Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Dennis Milton

Global systemwide sales grew 1.7% in November as same-store sales growth of 4.0%, slightly ahead of our estimates, was partly offset by translation impact of the stronger dollar. We are maintaining our 2005 and 2006 earnings per share estimates of $1.94 and $2.09, and our 12-month target price of $38. However, with McDonald's's shares trading near a multi-year high, we believe they are now appropriately valued. At 18 times our 2005 earnings per share estimate, McDonald's is at slight premium to peers. We think this fairly reflects our view of McDonald's's sales momentum and strong global brand, and we would not add to positions.

NEC (NIPNY) : Ups to 4 STARS (buy) from 2 STARS (sell)

Analyst: John Yang and Dylan Cathers

NEC announced a venture with Philips (PHG), combining the companies' commercial telecom equipment businesses. We believe NEC's exposure to the U.S. and Asia complements Philip's strength in Europe. Our fiscal year 2007 (ending March) earnings per American Depositary Receipt estimate rises to JPY 28.04 ($0.23) from JPY 25.74 ($0.21) on the expected positive effect of the venture and an anticipated improvement in worldwide corporate capex. Our fiscal year 2006 estimate remains JPY 25.49 ($0.21). Our target price rises to $7 (JPY 850) from $4.50.

Coventry Health (CVH): Ups to 5 STARS (strong buy) from 3 STARS (hold)

Analyst: Phillip Seligman

Coventry Health detailed its prospects at its analyst meeting. We are encouraged by its cost control focus, yielding the highest operating margin among peers. We see this as a competitive advantage, and we expect overall enrollment to rise to or above industry rates over the next few years. We also see its national accounts enrollment revitalizing in 2007 after cutting acquired unit's costs. We expect Coventry Health back on the acquisition front in 2006. We see $3.46 2006 earnings per share, after stock option costs, and $4.00 in 2007. Our target price rises by $14 to $72.

Lasalle Hotel Properties (LHO): Ups to 5 STARS (strong buy) from 4 STARS (buy)

Analyst: Raymond Mathis

After seeing a presentation by Lasalle Hotel Properties and briefly speaking with management, we are upgrading the REIT's shares to strong buy from buy. Its strategy of acquiring single properties that have repositioning opportunities in markets with high barriers to entry contrasts sharply with larger peers, in our view. We believe the strategy will allow the company to be more nimble than many peers, and thus operationally outperform. We view the three recently announced acquistions as demonstrating this strategy, and we reiterate our 12-month target price of $40.


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