Markets & Finance

S&P Keeps Strong Buy on Apple


From Standard & Poor's Equity Research

Apple Computer (AAPL) : Reiterates 5 STARS (strong buy)

Analyst: Richard Stice, CFA

Apple discloses that its internal investigation relating to stock option grants is widening to include the past four years. The initial scope targeted 1997 through 2001. The company expects to restate financial results to record non-cash charges. We are disappointed by the news, although we are not surprised given the company's acknowledgement when it reported June quarter results of this possibility. But given our view of Apple's valuable franchise and solid execution, and with potential positive news flow associated with next week's Developers Conference, we strongly advise purchase.

Duke Energy (DUK) : Cuts to 3 STARS (hold) from 5 STARS (strong buy)

Analyst: Kenneth Leon, CPA

After further review of the second quarter, we believe Duke Energy may be exposed to higher fuel costs for both its electric and natural gas utilities, which may lead to narrower margins for the entire company. While we are encouraged by management's initiative to spin off its gas transmission and field services units into a separate publicly held company, we see cost pressures on Duke Energy's remaining utilities. We are lowering our 2006 earnings per share (EPS) estimate to $1.80 from $1.90, and 2007's to $2.00 from $2.06. Our 12-month target price remains $33, and we see less upside after recent strength in share price.

Dreamworks Animation (DWA) : Ups to 2 STARS (sell) from 1 STAR (strong sell)

Analyst: Tuna Amobi, CPA and CFA

Shares are higher, in our view, on better-than-expected second quarter results, as well as strong home video and ancillary showing of Madagascar. We also see potential long term upside from Shrek 3 in 2007, and Madagascar 2 in 2008, and we are encouraged by Dreamworks Animation's comment suggesting some home video stability for current and catalog titles, previously of much concern. Still Dreamworks Animation was mum, somewhat disturbingly in our view, regarding the potential trigger of a secondary offering by key shareholder Paul Allen, which we think could rekindle selling pressure. Our 12-month target price stays $21.

Noble Energy (NBL) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Charles LaPorta

Second quarter operating EPS of $1.24 vs. 93 cents is above our $1.20 estimate. Noble Energy's three major deepwater Gulf of Mexico wells are now producing about 30,000 barrels of oil equivalent per day, and the company is continuing to develop this resource as well as other discoveries. The AMPCO plant turnaround is complete and should add 10% to Noble Energy's capacity; Israeli operations appear out of harms way and set to expand. We are raising our 2006 and 2007 EPS estimates to $5.90 and $8.30, from $5.25 and $6.30, respectively. Our target price rises $15 to $57.

Tesoro (TSO) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Tina Vital

Tesoro posts second quarter operating EPS of $4.66 vs. $2.65. Results beat our estimate by 98 cents, reflecting better-than-expected margins. Refining throughputs rose 0.6%, below our estimate; we expect flat 2006 growth. With our positive view for U.S refining margins, we are raising our 2006 operating EPS estimate $2.59 to $10.72, and 2007s by $2.93 to $8.38. We are maintaining our 12-month target of $83, which is an enterprise value of 4 times our 2006 earnings before interest taxes depreciation and amortization (EBITDA) estimate, a discount to peers.

Gateway (GTW) : Reiterates 3 STARS (hold)

Analyst: Richard Stice, CFA

Gateway reports second quarter loss of 2 cents vs. EPS of 5 cents, 6 cents narrower than our estimate, but 4 cents worse than the Street's forecast. Revenue rose 5% on strength in the retail segment and, based on IDC data, the company gained share in the U.S. PC market. Selling General & Administrative costs were below our forecast as a result of improved cost control efforts and lower sales tax reserves. The company offers no forward earnings guidance. We are narrowing our 2006 loss estimate by 9 cents to a 12 cents loss. However, we are reducing our price-to-sales-based 12-month target price by $1 to $2.


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