Walt Disney (DIS): Upgrades to 4 STARS (buy) from 3 STARS (hold)
Analyst: Tuna Amobi, CPA, CFA
Signs of improving fundamentals in Disney's core businesses have raised our confidence in a potential upturn. We think an ad rebound should drive great operating leverage in high fixed cost businesses. The U.S. parks are gradually rebounding, and ABC is riding momentum with shows like Desperate Housewives and Lost. The Incredibles should help ease tough film comparisons. With more licensing growth, the pending sale of Disney Stores North America should significantly elevate consumer product margins. We are raising our target price by $2 to $32, based on discounted-cash-flow and sum-of-parts analyses.
Computer Sciences (CSC): Reiterates 5 STARS (strong buy)
Analyst: Stephanie Crane, Richard Stice, CFA
CSC announced an extension to IT outsourcing contracts with General Dynamics. The length of the new deal is 7.25 years and has an estimated value of $1.6 billion. We view this positive news as further evidence of the company's strong pipeline of new business opportunities. In its September-quarter update, CSC noted that its near-term new business pipeline in the federal government market alone stood at $37 billion. Valuation remains attractive, in our view, with shares trading at a discount to peers on p-e and p-e-to-growth metrics.
Fannie Mae (FNM): Reiterates 2 STARS (sell)
Analyst: Erik Eisenstein
Today's Wall Street Journal reports that Fannie Mae's regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), is reviewing compensation received by top executives partly tied to financial performance between 2001 to 2003, which will be restated. Separately, Fannie Mae reports that the OFHEO is not prepared to approve dividend payments beyond 2004. Taken together, we think these developments show the continuing political and regulatory pressure on Fannie Mae to remediate its corporate governance, even after the recent departure of its CEO and CFO. Our target price remains $59, a historically low multiple on our 2005 earnings per share estimate of $7.73.
Micron Technology (MU): Reiterates 3 STARS (hold)
Analysts: Amrit Tewary, Scott Kessler
Micron Technology posted 23 cents November-quarter earnings per share, vs. breakeven, on par with our estimate. Net sales rose 6% from the August-quarter on higher megabit shipments of memory products and flattish average selling prices. We are encouraged by the significant November-quarter operating margin improvement, which we think resulted from better manufacturing efficiency and cost controls. As Micron ramps 300 mm production, we are wary of a potential supply/demand imbalance. We are keeping our February-quarter earnings per share estimate at 15 cents and our full fiscal 2005 (ending August) estimate at 66 cents. Our 12-month target price remains $13, based on price-to-sales analysis.
Marsh & McLennan (MMC): Maintains 3 STARS (hold)
Analyst: Gregory Simcik, CFA
Marsh & McLennan received a request for information from the SEC on transactions with parties in which company insiders or major shareholders had an interest. In particular, transactions with Trident Funds, a series of private equity portfolios managed by Marsh & McLennan, were named. We believe the Trident Funds have held investments in several reinsurers and property and casualty insurers and that the probe might be part of an industrywide probe into possible abuses of financial insurance and reinsurance transactions in order to manipulate accounting and earnings.
Adolor (ADLR): Maintains 3 STARS (hold)
Analyst: Jeffrey Loo, CFA
Adolor reported that its European Phase III trial for Entereg (Alvimopan) failed to meet its primary endpoints, though it met some secondary endpoints. We believe these results cast serious doubts on FDA approval in the U.S. of the recently submitted new drug application (NDA) for Entereg. The 3 phase III trials in the U.S. also showed mixed results and we believe the FDA will now require an added trial that we see lasting 18 to 24 months. We expect that the added trial will need to meet all endpoints for Adolor to resubmit an new drug application. We have lowered our target price to $11 from $13 on revised discounted-cash-flow analysis.
American Greetings (AM): Maintains 3 STARS (hold)
Analyst: Jason Asaeda
Before one-time items, November-quarter earnings per share of 79 cents, vs. 70 cents beats our estimate by a penny. Sale of the Magnivision unit and weak retail and gift wrap businesses contributed to the sales decline. But licensing earnings, cost savings and reduced interest expense aided results. We think efforts to raise sales productivity at retail will take time to pay off, and with costs still not aligned with sales trends, we are cutting our fiscal 2005 (ending February) earnings per share estimate by 43 cents to $1.37, and fiscal 2006's by 10 cents to $1.85. Blending our updated p-e and discounted-cash-flow models, our 12-month target price falls $1 to $28.
Constellation Brands (STZ): Reiterates 5 STARS (strong buy)
Analyst: Anishka Clarke
Constellation Brands received the necessary approvals from regulatory bodies and shareholders to complete the acquisition of the Robert Mondavi Corp. The transaction totals over $1 billion. We view the deal favorably and believe significant positives exist, including access to Mondavi's lead brand, Woodbridge, immediate distribution synergies in the U.S. and U.K., and enhanced product breadth. Despite possible marketing dilution, we see higher sales growth and cost savings in the longer term. We are raising our 12-month target price to $55 from $50, to reflect the p-e expansion that we anticipate.