News Corp. (NWS): Upgrades to 5 STARS (buy) from 4 STARS (accumulate)
Analyst: Tuna Amobi, CPA, CFA
News Corp.'s September-quarter earnings per share of 32 cents on 13% more shares, vs. 29 cents, is in line with our estimate. Double-digit operating income growth reflected gains at Fox Entertainment (FOX) cable nets and international print ads. Key to the long-term view are affiliates DirecTV and BSkyB, plus wholly-owned STARS Asia and newly acquired Sky Italia, which is likely on track for late fiscal 2005 (June) profitability. After the yes vote on U.S. re-incorporation, News Corp. now trades when-issued on the New York Stock Exchange, with regular trading to start Nov. 12. We still see fiscal 2005 earnings per share of 73 cents, but are raising our 12-month blended discounted-cash-flow/sum-of-the-parts target price by $5 to $25.
Qualcomm (QCOM): Reiterates 5 STARS (buy)
Analyst: Kenneth Leon, CPA
Qualcomm posted fourth-quarter (fiscal 2004) earnings per share of 29 cents, vs. 23 cents, excluding accounting changes for royalties, in line with our estimate. CDMA handsets shipped in third-quarter were 41 million, vs. the Street's 46 million estimate. Qualcomm expects strong first-quarter shipments of 48 million to 52 million, which is positive for license fees. Chipset volumes and average selling prices were solid in the fourth-quarter. With higher operating expenses and tax rates in fiscal 2005, we are lowering our earnings-per-share estimate to $1.20 from $1.30, and our new fiscal 2006 estimate is $1.50. We maintain our $45 target price. The company is priced near peers, but growing faster, and we see any share price weakness as an enhanced buying opportunity.
Constellation Brands (STZ): Reiterates 5 STARS (buy)
Analyst: Anishka Clarke
Constellation Brands agrees to pay $56.50 for Robert Mondavi (MOND) Class A shares, $65.82 for Class B, and to assume $325 million in debt. The value of the deal is 5% above thyeir first offer. At 13 times our fiscal 2006 (June) EBITDA estimate for Robert Mondavi, we view the price as favorable. Pending necessary approvals, closing should be in early 2005. We see a stronger Constellation Brands portfolio with Woodbridge and Robert Mondavi Winery brands and expect major synergies from leveraging distribution, along with higher sales growth and cost savings. We are raising our fiscal 2006 (Feb.) estimate 9 cents to $3.12, and 12-month target price $4 to $50.
Foot Locker (FL): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)
Analyst: Mark Basham
Foot Locker reported 14.4% higher October-quarter sales, on a 1.2% same-store sale increase. Foreign exchange fluctuations contributed 2 percentage points, suggesting to us that same store sales were up 1% on a constant currency basis. Foot Locker adds that gross margins declined, selling, general and administrative expenses were reduced, and third-quarter earnings per share should be 10% to 15% above October-quarter fiscal 2004's (Jan.) 41 cents. We are reducing our October-quarter earnings-per-share estimate to 48 cents from 51 cents, our fiscal 2005 estimate to $1.61 from $1.66, and our 2006 to $1.80 from $2.00. We are also lowering our discounted-cash-flow-based 12-month target price to $24 from $27, suggesting limited upside potential.
Electronic Data Systems (EDS): Maintains 3 STARS (hold)
Analyst: Stephanie Crane
Electronic Data Systems postponed their third-quarter earnings release for a second time, pending the completion of an internal investigation into an asset impairment charge for its Navy contract. It also notes concerns related to accounting of bonus accruals in 2003 and 2004, which could also delay results. We expect this news could affect share price, and we see some risk of volatility even though EDS continues to reaffirm prior guidance on results. We look for third-quarter earnings per share of 6 cents and see 22 cents for 2004. We are maintaining our target price at $20, which is based on discounted cash flow as well as relative p-e analyses.
Weight Watchers (WTW): Upgrades to 5 STARS (buy) from 3 STARS (hold)
Analyst: Howard Choe
Excluding unusual items, Weight Watchers posted third-quarter earnings per share 40 cents, vs. 38 cents, in line with our estimates. North American operations improve as the rate of decline in attendance slows. Should the new Core program catch on with members, we think profitability could return by at least mid-2005. We believe pressure from low-carb diets and packaged foods is likely to wane. With low capital requirements and running costs, Weight Watchers is a high-margin, cash flow generator. We view Weight Watchers as attractive, at a p-e-to-growth of 1.3, vs. S&P 500's 1.6. We are raising our target price to $45 from $42, assuming 21 times 2006 earnings-per-share estimates of $2.18.
UnumProvident (UNM): Reiterates 5 STARS (buy)
Analyst: Gregory Simcik, CFA
For continuing operations, UnumProvident posted third-quarter operating earnings per share of 41 cents, vs. 38 cents, 4 cents under our estimate. Income protection results were below forecast on lower earnings from recently-issued individual income protection line. We think a stabilizing job market helps claim incidence for group income protection products, but premium growth should remain low on slow job growth and price competition. We are also wary ahead of market-conduct exam results and probes of insurance broker practices. We are lowering our 2004 estimate to $1.65 from $1.74. Our 12-month price target remains $15.
American Eagle Outfitters (AEOS): Reiterates 5 STARS (buy)
Analyst: Marie Driscoll, CFA
October comparable-store sales rose 29%, vs. year-ago 19% drop, and October-quarter's rose 25%, vs. a 10% drop. Men's business was up a high-20 percentage and women's was up to the mid-30s. Product acceptance led to gains in transactions per store, average ticket, fewer markdowns and record margins. American Eagle increased October-quarter earnings-per-share quidance by 8 cents to 75 cents to 77 cents, vs. year-ago 25 cents. We are raising our October-quarter and January-quarter earnings-per-share estimates to 76 cents and 94 cents, from 68 cents and 87 cents, and full fiscal 2005 and fiscal 2006 (Jan.) estimates to $2.45 and $2.80, from $2.30 and $2.65. Our 12-month target price rises $4 to $44 on discounted-cash-flow and peer analyses.