Markets & Finance

S&P Boosts AT&T to Buy


From Standard & Poor's Equity Research

AT&T (T): Upgrades to 4 STARS (buy) from to 3 STARS (hold)

Analyst: Todd Rosenbluth

We are raising our 2006 operating EPS

estimate for AT&T by 13 cents to $2.08 and setting our 2007 EPS estimate of $2.25. Adjustments to our valuation model assume lower wireline operating costs and expected share buybacks, and exclude merger integration costs. We see risks from cable competition, the company's capital spending program, and a dilutive pending merger with Bellsouth (BLS). However, we think AT&T's cash flow growth will be strong. Our

12-month target price of $30, raised from $25, assumes a peer-average p-e of 14.5 times. Coupled with a 4.8% dividend yield, we find the shares attractive.

Business Objects (BOBJ) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Zaineb Bokhari

ADSs are indicated lower following Business Objects's preliminary Jun quarter revenue guidance of $287 million to $291 million, which is below previous guidance of $295 million to $300 million and our $299 million estimate. Weak sales execution, longer sales cycles for large deals and weakness in EMEA and Asia Pacific contributed to lower-than-expected license revenue of $116 million to $118 million, below our $139 million view. Services revenue of $171 million to $173 million beat our $160 million number. We our lowering our 2006 earnings per share (EPS) estimate by 14 cents to $1.01 and 2007's by 11 cents to $1.26. Our target price falls $13 to $27, or 27 times our 2006 EPS estimate, below the 3-year average for the shares of 28 times.

American Greetings (AM) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Jason Asaeda

Our upgrade reflects valuation following a recent decline in American Greetings's share price, as we keep our 12-month target price at $23. American Greetings posts May quarter operating earnings per share (EPS) of 25 cents vs. 36 cents, short of our 30 cents estimate. Sales declined 7% and pretax income was off 57%. Results benefited from 15% fewer shares and a 15% tax rate vs. year-ago 38%. As American Greetings executes its conversion to scan-based trading, and improving product delivery and merchandising, we expect continued pressure on sales and earnings during fiscal year 2007 (ending Feb.), and we are reducing our EPS estimate 5 cents to 95 cents, reflecting the May quarter.

WMS Industries (WMS) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Thomas Graves, CFA

We continue to estimate fiscal year 2007 (ending June) EPS of $1.30, up from the 97 cents we project for fiscal year 2006. But after recent price weakness, we view the stock as fairly valued. Longer term, we expect WMS to increasingly participate in an expected transition to gaming machines using server-based technology. Our 12-month target price for WMS remains $27.

PMC-Sierra (PMCS) : Reiterates 3 STARS (hold)

Analyst: Zaineb Bokhari

PMC-Sierra announces the resignation of the CFO and VP of Finance, Alan Krock, who will leave the company following a transition period. The company also expects second quarter revenues to be at the mid-point of the previous revenue guidance or $110 million, modestly above our $109.5 million forecast, before revenues of $8.5 million to $9 million from its recent acquisition of Passave. Our EPS estimates of 6 cents for the June quarter and 28 cents for 2006 are unchanged. Our 12-month target price falls $2 to $10.

Verizon Communications (VZ) : Maintains 3 STARS (hold)

Analyst: Todd Rosenbluth

Verizon Communications has filed documents with the Securities and Exchange Commission continuing its process, announced in late 2005, of looking to sell or spin out its directories business into separate, possibly tax-free entity. We expect directories to contribute only 4% of Verizon Communications's revenues in 2006, with the bulk of revenue growth coming from wireless, broadband and the MCI acquisition. However, we contend that with a 51% EBITDA margin, higher than other segments, the yellow-pages business is a strong contributor to Verizon Communications's cash flow. Verizon Communications has said that it will maintain its dividend, yielding 4.8%, regardless of what action it takes.


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