Markets & Finance

S&P Ups Royal Dutch Shell to Buy


From Standard & Poor's Equity Research

Royal Dutch Shell (RDS.A) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Tina Vital

Royal Dutch Shell posts second quarter operating earnings per American Depositary Share of $2.03 vs. $1.53. Results beat our estimate by 33 cents on better-than-expected margins. Hydrocarbon production declined 7.7%, worse than our expectations, on lower-than-expected gas volumes; we expect a full year decline of 3% in 2006. Still, we are raising our operating earnings per ADS estimate by 91 cents to $7.61 and 2007's by 91 cents to $7.73. Our 12-month target price by $9 to $84.

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

Analyst: Michael Souers

Ahead of July quarter results, to be released on August 15, we are upgrading Staples. We expect July quarter earnings per share (EPS) of 22 cents on 11% revenue growth, and believe that the nearly 20% decline in share price over the past three months is unjustified, given the industry's rational pricing environment and Staples's consistent execution in driving sales and earnings results.Our 12-month target price remains $28.

Western Digital (WDC) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Richard Stice, CFA

Western Digital posts June quarter EPS of 53 cents vs. 19 cents, well above our estimate. Results benefited from favorable tax adjustment. Revenue rose 15%. We are pleased with Western Digital's ongoing expansion into the consumer electronics and mobile markets, as these categories together accounted for over one-third of June quarter revenue. We are raising our fiscal year 2007 (June) EPS estimate by 11 cents to $1.82 and our 12-month target price by $1 to $24. Given our expectations for favorable industry trends, Western Digital's consistent level of execution, and seasonal benefit later in calendar 2006, we advise purchase of shares.

RealNetworks (RNWK) : Reiterates 3 STARS (hold)

Analyst: Scott Kessler

RealNetworks is indicated lower this morning, as it posts second quarter EPS of 22 cents vs. 3 cents, 6 cents above our estimate. Revenues rose 8%, in line with our forecast, driven by growth in games and music that was offset somewhat by declines in technology products and solutions, and media software and services. We are raising our 2006 EPS estimates to 75 cents from 69 cents, and 2007's to 33 cents from 28 cents due to our slightly more optimistic outlook for revenues and margins. But we are concerned about competition in the important games and music areas; second quarter music adds were much lower than we expected.

The9 Ltd. (NCTY) : Starts at 3 STARS (hold)

Analyst: Scott Kessler

After the success of World of Warcraft, launched in mid-2005. The9 Ltd. is China's third-leading provider of online games. We project net revenue growth of 95% in 2006 and 59% in 2007. However, we predict that the expansion of operating and net margins will stall somewhat, reflecting notable competition and anticipated development efforts. We have concerns about the company's reliance on third-party licensees. We are setting our earnings per American Depositary Share estimates at $1.27 for 2006 and $1.89 for 2007. Our 12-month target price is $30.

ITT Industries (ITT) : Ups to 5 STARS (strong buy) from 3 STARS (hold)

Analyst: Efraim Levy, CFA

Our upgrade is based on valuation. Before special items, ITT posts second quarter earnings per share (EPS) from continuing operations of 80 cents vs. 71 cents, above our 79 cents estimate. We think sales growth for the defense and the water & wastewater businesses should continue to be strong. Our 2006 and 2007 EPS estimates remain at $2.99 and $3.44, and we expect free cash flow to exceed net income in both years. Our 12-month target price remains $60. We think ITT will use strong cash flows to continue to support business growth and annual increase in dividend rate.


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