Markets & Finance

S&P Picks and Pans: Microsoft, BBBY, Garmin, KB Home


Analyst opinions on stocks making headlines Thursday

S&P REITERATES STRONG BUY RECOMMENDATION ON SHARES OF MICROSOFT

From Standard & Poor's Equity Research

MSFT; $29.60

Microsoft's video game Halo 3 generated $170 million in sales in its first day, breaking Halo 2's record $125 million. We believe Halo 3 will help sales of Xbox 360, extending its lead over PlayStation 3 for core video game players. Separately, Microsoft releases an update to Live Search with improvements to core search technology, better navigation to reviews, guides and other information related to a shopping item, and more localized business listings. We view the news as positive, though we are skeptical that Microsoft can reverse search engine marketshare loss to Google (GOOG; $568.65). /J. Yin

S&P REITERATES BUY OPINION ON SHARES OF BED BATH & BEYOND

BBBY; $33.83

August-quarter EPS of 55 cents vs. 51 cents is a penny higher than our estimate, aided by share repurchases and a slightly lower tax rate. We are impressed by a comp-store sales increase of 2.2% amid challenging industry conditions for home furnishings retailers, but are concerned that continued promotional activity will be required to keep driving sales. We are lowering our fiscal 2008 (ending February) and fiscal 2009 EPS estimates to $2.20 and $2.52, from $2.27 and $2.60, and reducing our discounted cash-flow (DCF)-based 12-month target price by $3 to $44. However, we view the shares as attractive, trading at a p-e-to-growth of 1.0 times. /M. Souers

S&P MAINTAINS BUY RECOMMENDATION ON SHARES OF GARMIN LTD.

GRMN; $117.25

Though we continue to see evidence of accelerating consumer adoption for personal navigation devices, penetration of the technology in the U.S. remains low, in our view. With Garmin's 50% U.S. market share for these devices, we see significant opportunity for strong growth over the next several years. We also believe recent distributor acquisitions will help the company gain market share in Europe. Based on a stronger revenue growth outlook, we are raising our 2008 EPS estimate to $5.02 from $4.15. We are also increasing our 12-month DCF-based target price by $30 to $136. /J. Peters, CFA

S&P MAINTAINS HOLD RECOMMENDATION ON SHARES OF KB HOME

KBH; $24.09

August-quarter per-share loss of $6.19 vs. EPS of $1.60 includes $690 million of non-cash charges to inventory, joint-venture impairments and lost deposits and fees from exiting land option contracts. Our forecast was 30 cents EPS. We believe the company took aggressive price cuts and sales incentives to reach $1.5 billion in revenue, in line with our forecast. But contract cancellation rate was 50%, compared with 34% in the May quarter. The company expects housing conditions to worsen through year end and into 2008 with rising foreclosure rates. We will update our financial outlook after the company's noon EDT conference call. /K. Leon, CPA


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