Markets & Finance

S&P Downgrades Phelps Dodge to Hold


From Standard & Poor's Equity Research

Phelps Dodge (PD) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Leo Larkin

With modest upside to our $92 12-month target price, we would hold Phelps Dodge but not add to positions. The shares are up sharply after news that Teck Cominco ((TCK) raised the cash portion of its hostile offer for Inco (N). In our view, the favorable reaction in Phelps Dodge's shares reflects the perception that the company's proposed merger with Inco will not occur, thereby avoiding dilution in the form of more shares and higher debt levels. Given that perception, it may be difficult for Phelps Dodge to match Teck Cominco's revised offer.

STMicroelectronics (STM) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Clara Van der Elst

STMicroelectronics posts second quarter EPS of 17 cents vs. 3 cents, 3 cents below our estimate. Revenue rose 15%, in line with our forecast. Gross margins were weaker than we expected. We are reducing our third quarter gross margin outlook to reflect currency issues, a fab phase-out, and a power blackout at the Sicilian plant. Capex was lower than we expected, and we foresee such levels aiding EPS. Given recent manufacturing issues and mixed end-market indicators, we think risk-reward considerations warrant our hold opinion. We are lowering our target price to $17 from $18.

Euronet Worldwide (EEFT) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Dylan Cathers

Euronet Worldwide shares are down about 25% since the company reported second quarter earnings. Revenues were below our projection, reflecting weak growth in the core Prepaid Processing segment after the expiration of an exclusivity pact with Telefonica in Spain. But within the Euronet Worldwide processing business, we see the strong revenue continuing on transaction growth and more ATMs under management. Our 2006 and 2007 EPS estimates remain $1.04 and $1.16. Our upgrade is based on valuation, and our 12-month target price is $32.

HouseValues (SOLD) : Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Robert McMillan

HouseValues, which operates a real estate oriented network of lead-generation websites, posts second quarter earnings per share (EPS) of 7 cents vs. 14 cents, meeting our 7 cents estimate. Although revenues rose 25% year-over-year, quarter-over-quarter revenue dropped about 4%, highlighting our concern that higher interest rates are leading to lower sales to mortgage providers and real estate agents. We are lowering our 2006 EPS estimate to 21 cents from 28 cents, and 2007's to 42 cents from 46 cents. Our 12-month target price falls to $5 from $7.

Sunrise Senior Living (SRZ) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Cameron Lavey

Sunrise Senior Living plans to restate financial results from 1999 through 2005, with net income reduced by $60 million to $110 million, pending completion of its accounting review. The final amount is expected to be recaptured in 2006 and 2007. While the review is not yet complete, we note that there is no change to cash flow or cumulative net income. We think today's announcement removes some risk in Sunrise Senior Living shares. Our 2006 earnings per share (EPS) estimate remains $1.18 and 2007's stays at $1.40. However, we are raising our 12-month target price by $2 to $28.

SanDisk (SNDK) : Maintains 3 STARS (hold)

Analyst: Clyde Montevirgen

SanDisk agrees to acquire competitor M-Systems (FLSH) for about $1.35 billion in an all-stock offer, which equates to $36 per share. The transaction is expected to close by late 2006, pending approvals. We view the proposed price, at about 1.6 times projected 2006 sales for M-Systems, as fairly priced. Although we are encouraged by the potential of this proposed deal to improve SanDisk's manufacturing scale and product portfolio, we are wary of potential integration risks. Our 12-month target price remains $57.


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