Markets & Finance

S&P Keeps Microsoft at Strong Buy After Gates' Planned Move


From Standard & Poor's Equity Research

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

Analyst: Scott Kessler

Microsoft announces that effective July 2008, Bill Gates will transition away from his day-to-day role at the company. Former CTO Ray Ozzie assumes Gates's former position of Chief Software Architect, and former CTO of Advanced Strategies and Policy, Craig Mundie, takes the new position of Chief Research and Strategy Officer. Gates will remain Microsoft's Chairman. On a conference call, he indicated he does not have plans to accelerate the sale of his Microsoft shares. We believe Microsoft's management bench strength is more than adequate to account for the departure of Gates in two years.

Novell (NOVL) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Clyde Montevirgen

Shares have fallen approximately 50% year-to-date, as Novell faces problems transitioning customers from its NetWare to Linux-based products. Although revenue growth remains a concern to us, we expect profitability to improve over the next twelve months on management's focus on trimming costs and on the recent divestment of the company's Celerant consulting business. Novell still has a strong balance sheet, in our opinion, with over $1.3 billion in cash and equivalents as of April 2006. Our 12-month target price remains $6.

Time Warner (TWX) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Tuna Amobi, CPA and CFA

With our view that Time Warner is cautious on digital content investments, we see sentiment dampened by emerging platforms competition. We are lowering our target price by $3 to $19.

Oracle (ORCL) : Maintains 4 STARS (buy)

Analyst: Zaineb Bokhari

Preliminary May-Q non-GAAP revenues grew 22% to $4.94 billion, above our $4.6 billion estimate. Oracle sees May quarter operating earnings per share (EPS) of 29 cents, a penny above our estimate. New software licenses grew 32% to $2.12 billion, $268 million above our view, on 83% higher application-related licenses and 18% higher database licenses. Despite what we consider to be solid growth in May quarter licenses and total revenues, new EPS guidance indicates to us that fiscal year 2006 (ending May) operating margins likely remained flat. We are raising our fiscal year 2006 operating EPS estimate a penny to 80 cents and fiscal year 2007's by 2 cents to 89 cents. Our 12-month target price stays $17.

Medarex (MEDX) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Jeffrey Loo, CFA

Medarex announces it received a subpoena from the U.S. Attorney's Office and a letter of informal inquiry from the SEC for information related to Medarex's past stock option grants and practices. Medarex is now among more than 40 companies who are under investigation regarding backdating of stock options. Although we continue to view the company's pipeline very positively, we believe these investigations will bring uncertainty and become an overhang for its shares. We are lowering our 12-month target price by $6 to $13 in order to account for higher risk.

CF Industries (CF) : Starts at 2 STARS (sell)

Analyst: Stuart Benway, CFA

CF is a major North American producer of fertilizer products. Core markets and distribution facilities for the company are concentrated in the midwestern U.S. grain-producing states. CF's primary raw material is natural gas, and the recent volatility in the price of that product has created an uncertain earnings environment, in our view putting the company at a disadvantage to many of its major overseas competitors. We project 2006 earnings per share (EPS) of 60 cents, and 90 cents for 2007. Our 12-month target price is $12.


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