Markets & Finance

S&P Downgrades PETCO to Hold


From Standard & Poor's Equity Research

PETCO Animal Supplies (PETC) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Michael Souers

PETCO agrees to be acquired by two private equity firms for $29 per share in cash. Leonard Green & Partners and Texas Pacific Group will acquire PETCO in transaction valued at about $1.8 billion, including assumed debt. We expect the deal to receive both shareholder and regulatory approvals, and are increasing our target price for PETCO to $29 from $27 to reflect its terms. We think this proposed deal also has positive implications for peer PetSmart (PETM) as a potential acquisition candidate, given our view of PetSmart's superior free cash flow generation and balance sheet.

Expedia (EXPE) : Starts at 3 STARS (hold)

Analyst: Scott Kessler

Expedia is one of the leading players in the worldwide online travel segment, with businesses that include namesake Expedia, Hotels.com, Hotwire.com, TripAdvisor and majority-owned eLong (LONG) in China. Expedia shares have fallen 43% year-to-date, in our view reflecting competitive pressures, restrained access to inventory and execution challenges. We project earnings per share (EPS) for 2006 of 89 cents and for 2007 of $1.08, after notable stock option expenses. Based on relative and intrinsic analyses, and accounting for a discount due to the risks that we see, our 12-month target price is $16.

Broadcom (BRCM) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Tom Smith, CFA, David Kaplan

Broadcom announced that it found that some stock option grants from 2000-2002 had been backdated, and it will restate results by recording an additional expense of $750 million through the first quarter of 2006, most of which relate to the years 2000 to 2003. While the grants identified were not awarded to co-founders, chief executives or board members, this expense still negates the equivalent of several years worth of shareholder profits. Broadcom doesn't expect to report full financial results on July 20, which reduces our visibility into operations. We are lowering our 12-month target price to $32 from $55.

EMC (EMC) : Cuts to 4 STARS (buy) from 5 STARS (strong buy)

Analyst: Richard Stice, CFA

EMC posts second quarter EPS of 12 cents vs. 12 cents, a penny below our estimate. Revenues rose 10% as software growth helped to outweigh product transition issues. We are reducing our 2006 EPS estimate by 2 cents to 53 cents, and our 12-month target price by $6 to $12. We are encouraged by EMC's market position, product breadth, and share repurchase program. However, given recent execution difficulties, as well as potential integration risks related to the proposed acquisition of RSA Security (RSAS), we are taking a less positive stance.

General Motors (GM) : Reiterates 2 STARS (sell)

Nissan Motor (NSANY) : Reiterates 3 STARS (hold)

Analyst: Efraim Levy, CFA

GM CEO Rick Wagoner meets today with Nissan and Renault SA CEO Carlos Ghosn about potential benefits of an alliance. We see hesitancy from Wagoner's perspective and enthusiasm from Ghosn's. We also see greater potential synergies for Nissan and Renault than for GM. Also, while Nissan and Renault allied successfully, GM has felt the sting of unsuccessful and costly partnerships. While we think an alliance is unlikely to take place, we believe the meeting gives Ghosn the opportunity to persuade Wagoner of potential benefits of partnering.

Media General (MEG) : Reiterates 4 STARS (buy)

Analyst: James Peters, CFA

Media General posted EPS from continuing operations and excluding one-time items of 77 cents vs. 80 cents. Revenues were up 3.3%, while expenses rose 5.4%. We expect strong political advertising and better cost control to result in an improving operating margin during the second half of 2006. Equity income rose to $4.5 million from 0.7 million due to better performance at SP Newsprint. We are lowering our 2006 EPS estimate to $3.02 from $3.10 to exclude 8 cents of earnings from discontinued operations due to planned asset divestitures. We are lowering our 12-month target price to $45 from $49.


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