Markets & Finance

S&P Cuts UAL, AMR, US Airways, and Continental


Analyst Jim Corridore warns that the airline industry faces rising fuel prices heading into the summer driving and hurricane season.

UAL Corp. UAUA

Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Jim Corridore

We have become increasingly worried about weakening industry revenue trends and rising oil prices heading into the summer driving and hurricane season. Given our view of weakening fundamentals, we are less bullish on legacy airlines and UAL in particular. We think the company has higher costs than peers, and it operates in some domestic markets experiencing extreme price pressure. We are cutting our 2007 earnings per share (EPS) estimate to $2.50 from $3.00; and our 12-month target price to $24 from $40, 9.6 times our 2007 EPS estimate, and in line with peers. We view the shares as high risk.

AMR Corp. AMR

Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Jim Corridore

We are cutting our 2007 EPS estimate to $3.57 from $4.45 and our 12-month target price to $32 from $45, valuing the shares at about 9 times our 2007 EPS estimate, in the middle of AMR's historical price-to-earnings range during past periods of profitability. Given our view of weakening industry revenue trends at a time when oil has recently risen sharply and when we are entering hurricane and summer driving season, we think industry and company fundamentals no longer support a buy recommendation. We categorize the shares as high risk and expect them to remain volatile.

US Airways Group LCC

Cuts To 3 STARS (hold) from 5 STARS (strong buy)

Analyst: Jim Corridore

Our sentiment on the airline industry and on US Airways shares has become less bullish given weakening industry revenue trends and a sharp rise in oil prices heading into the hurricane and summer driving seasons, which could see oil prices retrace record highs. US Airways shares have already reacted to much of this news, but we see little positive catalysts in the coming weeks, and much risk related to oil and weaker industry fundamentals. We are cutting our 2007 EPS estimate to $6.00 from $7.50; and our 12-month target price to $37 from $68, well below peers at about 6 times our 2007 EPS estimate.

Continental Airlines CAL

Cuts to 3 STARS (hold) from 5 STARS (strong buy)

Analyst: Jim Corridore

Continental April traffic statistics show a drop in loads and weaker unit revenues than we were expecting. This, coupled with general weakness in March industry revenues and higher oil over the past few months has changed our view of the industry's fundamentals and the stock's attractiveness. We are cutting our 2007 EPS estimate to $4.50 from $5.90, and our 12-month target price to $40 from $65. Our target price values the shares at about 8.9 times our 2007 EPS estimate, below peers and towards the low end of Continental's historical valuation range. The shares are categorized as high risk.

CB&I CBI

Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Stewart Scharf

CBI posts first quarter EPS of $0.38 vs. $0.13, $0.09 above our estimate. Revenues climbed 33%, as strength in the energy market led to new awards, especially in Central and South America. We see further global demand for liquefied natural gas and refining projects. We expect wider margins on a better revenue mix and improved operating efficiencies, while better internal controls should aid financial reporting. We are raising our 2007 EPS estimate $0.20 to $1.60, and 2008's $0.30 to $1.95. Applying an above-peer price-to-earnings of 26 times our 2007 estimate, we lift our 12-month target price by $9 to $42.

Cigna CI

Ups to 3 STARS (hold) from 4 STARS (buy)

Analyst: Phillip Seligman

First quarter operating EPS of $2.67 vs. $2.11 beats our estimate by $0.17, on higher revenue than expected. Premium and fee revenue grew 14%, partly on pricing and more members. We view CI's 2007 overall 5% to 6.5% member growth target as doable, and we are encouraged by its Selling General & Administrative cost control and guaranteed-cost medical loss ratio drop. But we think CI has much to do to rebuild experience-rated enrollment and improve the unit's medical loss ratio. We raise our 2007 EPS estimate by $0.40 to $10.95 and our target price by $8 to $164. But after shares' recent rise, we view CI as fairly valued.


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