Markets & Finance

S&P Ups Ericsson to Buy from Hold


From Standard & Poor's Equity Research

Ericsson (ERICY) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Inger Soderbom

Ericsson provided little new information at its Capital Markets Day compared to guidance given after recent first quarter results, in our view. We continue to see Earnings Before Interest and Tax margin of 17.7% in 2006. We believe a few ambiguous answers by management regarding margins caused Wednesday's 4% selloff in the American Depositary Shares. Regarding the Marconi integration, Ericsson said workforce reductions and restructuring charges will result in SEK 2 billion in annualized cost savings in 2006. We believe Ericsson has a leading position in high-speed 3G networks. Our 12-month target price for the ADS is $38, up from $37.

Staples (SPLS) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Michael Souers

Ahead of April quarter results to be reported on May 16, we are downgrading the shares based on valuation. While we view Staples as the preeminent company in office supplies retailing, we do not think its shares carry much upside potential, trading now at 21 times our fiscal year 2007 (ending January) earnings per share (EPS) estimate of $1.27. We expect Staples to continue to produce consistent sales and earnings growth amid what we view as a rational domestic pricing environment and favorable conditions for increased business spending. However, the shares are approaching our target price of $28.

OfficeMax (OMX) : Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Michael Souers

OfficeMax shares have risen about 30% since the company reported first quarter results that exceeded expectations. While we believe conditions in the office supply retailing industry are somewhat favorable, most notably a reasonably rational pricing environment, we believe OfficeMax shares are overvalued at about 27 times our 2006 earnings per share (EPS) estimate of $1.67. We also think that several hiccups may accompany the company's turnaround process currently under way, and that investors are pricing the shares as if little risk remains. Our target price remains $38, well below the current price.

Deutsche Telekom (DT) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Cristina Perea

The downgrade reflects our view of Deutsche Telecom's weaker prospects for the rest of 2006. We believe its fixed-line and broadband businesses will show softer growth than we had projected. First quarter sales for these operations were down 4.6% and Deutsche Telekom's enterprise unit posted a 3.7% decline, though first quarter revenues for Deutsche Telekom's wireless unit rose 13.4%. Despite some positive news on labor union issues in the current quarter, we do not see a near term recovery in the company's operating trends. We are lowering our 12-month target price for the American Depositary Shares to $18 from $20.

Alexandria R.E. Equities (ARE) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Robert McMillan

First quarter funds from operation of $1.24 vs. $1.19 is a penny above our $1.23 estimate. Results were healthy, in our view, and benefited from acquisitions and robust demand for lab space, helping sales rise 25%. During the quarter, the company was able to realize a 6% jump in rental rates on lease renewals; the occupancy rate remained healthy at 94%. We expect demand for the company's lab space to remain robust in 2006. We are keeping our 2006 funds from operation estimate at $5.15, but are increasing our 2007 estimate to $5.61 from $5.55. We are raising our target price to $94 from $88.

Imation (IMN) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Richard Stice, CFA

The shares have declined more than 15% since mid-April, and we believe a very attractive risk/reward opportunity exists. Moreover, earlier this month, the company completed the acquisition of Memorex, which we view as positive, since it expands Imation's reach in the optical media retail market. We expect synergies from the deal to occur largely beginning in 2007 and we are raising our 2007 EPS estimate by 38 cents to $2.71. Our 2006 EPS estimate remains $2.03, along with our 12-month target price of $53. We believe Imation is attractive on its valuation and on its broadening portfolio.


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