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S&P Says Upgrades Tellabs to Accumulate

Tellabs (TLAB): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Kenneth Leon, CPA

Following a 32% decline from its recent 52-week high, we view Tellabs shares as attractively valued compared with peers and the S&P 500. We forecast 17% sales growth in 2004 on a pickup in demand for DSL, broadband, and wireless networks. We are positive on the proposed $1.9 billion acquisition of Advance Fibre to broaden Tellabs' products, like fiber to the premise. The deal is expected to close in the second half, subject to approvals. Our 12-month target price is $10, based on forward price-sales metrics. At 2.8 times our 2004 sales estimate, below peers, we find Tellabs attractive.

Hibbett Sporting Goods (HIBB): Initiates with 4 STARS (accumulate)

Analyst: Mark Basham

Hibbett's 8.8% same-store sales gain in the April quarter leads our sporting-goods retailing peer group. The company posted April-quarter earnings per share of 34 cents, vs. 23 cents, and we estimate earnings per share of $1.09 in fiscal 2005 (Jan.) and $1.27 in fiscal 2006. We view Hibbett favorably because of its high return on equity with a debt-free balance sheet, its low-risk expansion program with relatively low capital required per new store, and its concentration on team sports in small markets in the Sunbelt region. Assuming a 10.3% cost of capital and a 3% terminal growth rate, our discounted cash-flow model leads us to a 12-month target price of $29.

Dell (DELL): Reiterates 4 STARS (accumulate) and EMC Corp. (EMC): Reiterates 5 STARS (buy)

Analysts: Megan Graham-Hackett; Richard Stice, CFA

Dell and EMC set an arrangement on AX100 systems to capitalize on the rapid growth seen for the low end of the SAN market, with forecasts of up to a $4 billion market by 2006. Dell will manufacture the AX100 for its own distribution and EMC will distribute through other partners. We view the news as positive and believe it builds on EMC's information lifecycle strategy. Our estimates are unchanged, but we think the AX100 could take meaningful share in the small and medium enterprise market. With Dell and EMC shares trading below our target prices of $39 and $17, respectively, we view both as attractive.

PeopleSoft (PSFT): Maintains 3 STARS (hold)

Analyst: Jonathan Rudy, CFA

PeopleSoft's board recommended that shareholders reject the latest cash tender offer of $21 per share from Oracle. The board says that the offer does not reflect PeopleSoft's real value, and that there are antitrust issues with any potential combination. Separately, PeopleSoft settled outstanding shareholder lawsuits regarding its customer assurance program by limiting contract terms to actions taken by Oracl in its acquisition efforts. We would continue to hold positions in PeopleSoft, near our 12-month target price of $20 based on relative enterprise value to sales and p-e to growth metrics.

Computer Associates (CA): Maintains 3 STARS (hold)

Analyst: Jonathan Rudy, CFA

March-quarter operating earnings per share of 18 cents, vs. 8 cents was 2 cents better than our estimate. Revenues of $850 million were slightly better than our estimate. Computer Associates noted strength in its enterprise management and security product groups. We are raising our fiscal 2005 (Mar.) operating earnings per share estimate to 82 cents, from 81 cents. Our S&P Core earnings per share estimate for fiscal 2005 is 78 cents, which includes 4 cents per share of estimated option expense. Given the ongoing Securities and Exchange Commission and Department of Justice investigation, we would not add to positions. Still, we like Computer Associates' improving balance sheet and valuation, with shares trading at a discount to peers on an enterprise value-to-sales basis.

Freddie Mac (FRE): Maintains 2 STARS (avoid)

Analyst: Erik Eisenstein

Freddie's April volume data shows more contraction in its retained mortgage portfolio than fellow mortgage financier Fannie Mae, appearing to us to have been less aggressive with its purchases. Still, we attribute the decline mostly to refinancing-induced prepayments, which we see tapering off after the recent rise in mortgage rates. We therefore continue to see retained portfolio growth in 2004, and we are leaving our 2004 earnings per share estimate at $6.23. Our 12-month target price remains $56, representing our view of a fair, but historically low multiple, and our 2004 estimate.

RealNetworks (RNWK): Maintains 3 STARS (hold)

Analyst: Scott Kessler

On Tuesday, RealNetworks held its Investor Meeting in New York, offering specifics regarding its vision, strategy, offerings, and financials. We continue to believe RealNetworks has significant opportunities in its emerging music and games categories, where the company has notable market leadership following the acquisitions of in August, 2003 and GameHouse in January, 2004. However, material changes to RealNetworks' business model and management turnover over the past few years, along with recent operating losses, still concern us. Our 12-month target price remains $7, based on discounted cash-flow analysis.

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