Markets & Finance

S&P Cuts AMD To Hold


From Standard & Poor's Equity Research

Advanced Micro Devices (AMD): Cuts to 3 STARS (hold) from 5 STARS (strong buy)

Analyst: Thomas Smith, CFA

AMD agrees to acquire graphics chipmaker ATI Technologies (ATYT) for about $5.4 billion, consisting of $4.2 billion cash and 57 million AMD shares. It aims to close the deal in the fourth quarter, subject to necessary approvals. We see merit in AMD's attempt to improve product differentiation by offering better graphics and central processor combinations. And we would expect cost savings in selling, general & administrative costs. However, we note the deal's execution risk and debt burden. On balance, we prefer to take a more cautious view on AMD shares, in line with our neutral view on the Semiconductors Sub-Industry.

Schering-Plough (SGP) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Herman Saftlas

We see Schering-Plough clearly delivering on its turnaround strategy, as second quarter earnings per share (EPS) reaches 25 cents vs. last year's 5 cents loss, before 9 cents in plant rationalization costs, surpassing our estimate by 8 cents. Key sales drivers were Remicade (+31%), Nasonex (+21%) and PEG-Intron (+25%). Royalties from the important Vytorin/Zetia joint venture doubled to $355 million, exceeding our forecast. We see Vytorin, boosted by competitive advantages, continuing to gain market share in the $20 billion U.S. cholesterol market. Our 12-month target rises by $3 to $25.

E.W. Scripps (SSP) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Loran Braverman, CFA

E.W. Scripps reports second quarter earnings per share (EPS) from continuing operations of 62 cents vs. 64 cents, 6 cents ahead of our estimate. The upside reflects about equally a higher-than-expected overall operating margin, higher-than-forecasted equity earnings from various joint ventures, and a lower-than-projected tax rate. Total sales were in line with our estimate. We are raising our full-year 2006 EPS estimate by 7 cents to $2.17. Primarily on lowered peer multiples, we are lowering our 12-month target price by $3 to $51.

Avaya (AV) : Ups to 2 STARS (sell) from 1 STAR (strong sell)

Analyst: Ari Bensinger

Recent data points suggest to us solid spending trends for enterprise communications equipment, Avaya's core target market. We also believe the company could benefit from recovered sales related to recent supply chain issues. We see a decline in legacy product sales, as well as competitive pressures in the IP telephony space, as long-term negatives for Avaya. But given our view of an improving end-market entering the company's seasonally strong June quarter and September quarter, we are taking a less negative stance on the shares. Our 12-month target price remains $9, 19 times our fiscal year 2006 (ending September) EPS estimate.

Gateway (GTW) : Reiterates 3 STARS (hold)

Analyst: Richard Stice, CFA

Gateway is scheduled to report second quarter results after the market close on August 3. We project a revenue increase of 28% as the company benefits from a further push into the retail segment, but a loss per share of 8 cents, vs. year-ago EPS of 5 cents, reflecting a less favorable business mix. Based on our view of increasing competitive threats within the PC market, we are lowering our price/sales-based 12-month target price to $3 from $5. But given recent share gains in the retail market, and with cash on the balance sheet of $1.23 per share, we view Gateway shares as worth holding.

Exxon Mobil (XOM): Reiterates 5 STARS (strong buy)

Analyst: Tina Vital

Exxon Mobil is set to post second quarter results on Thursday, July 27. We expect this supermajor oil outfit to report after-tax operating earnings for the quarter of $9.92 billion, or $1.62 per share. Our updated price and margin projections lead us to raise our operating EPS estimates for all of 2006 by 29 cents, to $5.97; for 2007 by 31 cents, to $5.91; and for 2008, by 27 cents, to $5.80. Based on a blend of our discounted cash-flow and relative

valuation measures, we are increasing our 12-month target price by $2 to $77 per share, representing an enterprise value 6.8 times our 2006 EBITDA estimate, a premium multiple to peers.


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