Please see the note below regarding changes to Standard & Poor's STARS ranking system.
American International Group (AIG): Reiterates 4 STARS (buy)
Analyst: Catherine Seifert
Published reports indicate AIG may be close to settling with the SEC over allegations it helped PNC Financial Services (PNC) commit accounting fraud by moving bad loans off its books via a form of retroactive insurance. We are encouraged by this news and believe resolution of this issue provides AIG shares with an important catalyst. Our outlook is tempered by the ongoing attorneys general investigations, but we still view AIG as well positioned, long term. Our $72 12-month target price assumes a 14 times forward p-e multiple, at the low end of AIG's historical range.
Wrigley (WWY): Maintains 5 STARS (strong buy)
Analyst: Richard Joy
Wrigley agrees to acquire confectionery brands from Kraft Foods (KFT), including Life Savers and Altoids, for a net cost of $1.2 billion. The deal values the brands at about 2.4 times sales and 12 times EBITDA; above typical food industry multiples but in line with past deals for confectionery assets. We view the planned deal favorably. We see substantial margin and revenue synergies as acquired brands benefit from Wrigley's scale, distribution strength and confectionery expertise. Wrigley expects the deal to close by mid-2005, pending regulatory approvals. We are raising our target price by $6 to $78.
General Electric (GE): Reiterates 3 STARS (hold)
Analyst: Robert Friedman, CPA
As part of a $140 billion-revenue giant's desire to provide integrated services to commercial infrastructure market, GE has agreed to pay $1.4 billion in cash to buy SPX Corp.'s (SPW) security systems business, pending regulatory approval. We think security systems business possesses attractive economics, as the industry is fragmented, has good growth potential, requires modest capital reinvestment, and provides recurring earnings streams from long-term contracts. But, given GE's enormous size, we think it will need these types of businesses just to maintain 8.5%-plus long-term earnings-per-share growth rates.
Dow Jones & Co. (DJ): Reiterates 4 STARS (buy)
Analyst: William Donald
Dow Jones announced a definitive agreement to acquire MarketWatch (MKTW) for $519 million, or $463 million net of MarketWatch's cash. The transaction is expected to close the first quarter of 2005 and is subject to regulatory and MarketWatch shareholder approvals. Viacom (VIA.B) and Pearson Plc (PSO) each own 23% of MarketWatch. Dow Jones expects 5 cents earnings-per-share dilution in 2005 and a boost to 2006 earnings per share. We are lowering our 2005 earnings-per-share estimate by 5 cents to $1.60, compared to our $1.25 estimate for 2004. Our initial 2006 estimate is $2.20. We are keeping our 12-month target price at $49, 22 times our 2006 earnings-per-share estimate, still a premium over peers.
Computer Associates (CA): Maintains 3 STARS (hold)
Analyst: Zaineb Bokhari
Computer Associates announced it plans to sell about $750 million worth of 5- and 10-year senior unsecured notes through a private offering. We expect the company to use the funds from this planned offering to pay down debt, most notably its $825 million 6.375% senior notes maturing April 15, 2005. We expect the new notes to be issued at favorable interest rates, and look for Computer Associate's overall debt levels to decline slightly to $2.2 billion from $2.3 billion, pending completion of this transaction and subsequent redemption or maturation of the 2005 senior notes. We are not changing our estimates.
Northeast Utilities (NU): Maintains 3 STARS (hold)
Analyst: Justin McCann, Todd Rosenbluth
Northeast Utilities announced that it projects its 2005 earnings per share to be between $1.10 and $1.25, lower than its prior guidance of $1.35 to $1.45 and our $1.40 estimate. The company said the shortfall will likely occur because of highly competitive bidding conditions, particularly in its energy services businesses, and weaker commodity prices. Northeast Utilities has not changed its 2005 earnings-per-share outlook on its regulated businesses. Our 2004 earnings-per-share estimate of $1.30 remains in line with the company's reiterated guidance, but we are placing our 2005 earnings-per-share estimates under review.
Lehman Brothers (LEH): Reiterates 5 STARS (strong buy)
Analyst: Robert Hansen, CFA
At a conference today, Lehman Brothers reiterated its expectation for slower growth in fiscal 2005 (Nov.), vs. fiscal 2004, despite its positive outlook on the economy. We expect strong growth in investment banking, equity capital markets, and asset management to offset our forecasted modest decline in fixed income in fiscal 2005. We are leaving our earnings-per-share estimates unchanged at $7.75 for fiscal 2004 and $7.50 for fiscal 2005; but raising our 12-month target price to $110 from $105, 15 times our fiscal 2005 earnings-per-share estimate, given higher peer valuations. We think Lehman Brothers maintains a strong competitive advantage and recommend strong buy.
Tyson Foods (TSN): Reiterates 3 STARS (hold)
Analyst: Joseph Agnese
September-quarter earnings per share of 19 vs. 42 is in line with our estimate. Higher live cattle costs, lower capacity utilization and decreased international sales continue to hurt the beef segment. However, demand remains strong for pork, and pricing has improved within the chicken and prepared food segments. Tyson sees fiscal 2005 (Sept.) earnings per share in the range of $1.15 to $1.45, with beef efficiencies, raw material costs, and economic growth being the largest swing factors in its forecast. We are maintaining our fiscal 2005 estimate at $1.35, but raising our 12-month target price $1 to $18, based on our discounted-cash-flow and p-e analysis.
American Express (AXP): Maintains 3 STARS (hold)
Analyst: Evan Momios, CFA
We are not surprised by American Express's decision to sue the Visa and MasterCard associations and eight major banks for antitrust violations. Recently, American Express's CEO had indicated the possibility of pursuing legal action. The suit does not include MBNA Corp. (KRB), an American Express card issuer, or Citigroup (C), a potential partner, in our view. Though we think it is premature to estimate the potential financial impact on the parties involved, we are reluctant to suggest that large banks are now more likely to issue American Express cards in the near term. Our 12-month target price remains $56.
HSBC Holdings (HBC): Downgrades to 3 STARS (hold) from 4 STARS (buy)
Analyst: Winston Siay
We are lowering our recommendation on HSBC, as we believe the shares' current valuation is appropriate. Our 2004 and 2005 earnings-per-ADS forecasts remain unchanged at $5.62 and $5.77, respectively, translating to p-e ratios of about 15.6 times and 15.2 times. We believe our estimates have already captured the positive earnings impact stemming from selective synergies from the Household acquisition, strong volume growth in Europe and the U.S., and encouraging fee income trends. We are raising our 12-month target price to $88 from $85.
Note: Effective Novermber 12, 2004, Standard & Poor's has modified its S&P STARS nomenclature:
5 STARS now designates a stock ranked strong buy, instead of the previous buy;
4 STARS is now buy, instead of accumulate;
2 STARS is now sell, instead of avoid; and
1 STARS is now strong sell, instead of sell.
The 3 STARS ranking remains as hold.