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S&P Keeps HP at Hold as Fiorina Exits

Hewlett-Packard (HPQ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Hewlett-Packard's board announced this morning that Chairman and CEO Carly Fiorina is stepping down, effective immediately. We are not entirely surprised by the announcement, as the company's execution has not been consistent under her tenure, in our opinion. We believe the news reflects the board's frustration with the inability of the company to meet profitable growth objectives, but we were surprised by new HP Chairman Dunn's comment that the board does not intend to change strategy.

While we view Bob Wayman, CFO, who is to be named as interim CEO, as an effective operations manager, we are concerned about the company's strategic direction, particularly in servers, during a highly competitive time. In our view, Wayman is a logical choice to succeed Fiorina, but we believe uncertainty about the CEO post could weigh on HP's ability to do enterprise deals. Still, HP says its January-quarter should be in line with expectations. Trading below its peers on a price-to-sales basis, we view HP shares as worth holding.

Cisco Systems (CSCO): Reiterates 5 STARS (strong buy)

Analyst: Ari Bensinger

Cisco posted January-quarter earnings per share of 22 cents, vs. 18 cents, in line with our estimate, as strong enterprise spending offset weak government demand. Gross margins were hampered by increased investment in services. Quarterly cash flow from operations stood at $1.8 billion, above our forecast. We believe the networking environment is improving, as evidenced by quarterly orders outpacing revenue. Cisco guides fiscal 2005 (ending July) sales growth at about 13%, in line with our model. Our fiscal 2005 (ending July) earnings per share estimate stays 90 cents, fiscal 2006's earnings per share at $1.05, and our target price stays $23. At 17 times our fiscal 2006 earnings per share estimate, below peers, we rate the stock a buy.

Computer Sciences (CSC): Downgrades to 4 STARS (buy) from 5 STARS (strong buy)

Analyst: Stephanie Crane

CSC reported December-quarter earnings per share from continuing operations of 69 cents, vs. 65 cents. Including discontinued operations, earnings per share was 82 cents, vs. 68 cents, below our estimate of 87 cents. Revenues rose 6%, with new pipeline business of $5 billion. However, revenues for continuing operations from government entities, including the Department of Defense, civil agencies, and other state and local entities declined, leaving us concerned over momentum. We are lowering our earnings per share estimate for fiscal 2005 (ending March) from $3.19 to $3.15. Our 12-month target price stays at $60, and is based on a p-e multiple of 19 times our fiscal 2005 earnings per share estimate.

Texas Instruments (TXN): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Market sentiment for chip stocks seems to have improved recently as these stocks are up, on average, in the high-single digit percentage range over the last two weeks. We think the improved market sentiment can support slightly higher p-e and price-to-sales multiples for Texas Instruments over the near term. Hence, we are raising our 12-month target price by $3 to $27, based on our revised p-e and price-to-sales analyses. Our new target price assumes a target p-e of 24 times our 2005 earnings per share estimate and a target price-to-sales ratio of 3.7 times our 2005 sales per share estimate.

Goldman Sachs (GS): Reiterates 5 STARS (strong buy) and raises target

Analyst: Robert Hansen, CFA

At a conference, Goldman Sachs stressed that its fixed income business is a growth business, despite quarterly volatility. The company also reiterated its 20% target return on tangible equity, and highlighted global business opportunities, particularly through its venture in China. We think Goldman Sachs remains interested in acquisitions that would add assets under management or technology. We are maintaining our fiscal 2005 (ending November) earnings per share estimate at $8.00, aided by improving mergers and acquisition and equity activity, but are raising our 12-month target price to $138 from $130, 17 times our fiscal 2005 earnings per share estimate, a premium to peers.

Guitar Center (GTRC): Maintains 5 STARS (strong buy)

Analyst: Markos Kaminis

Guitar Center's fourth-quarter earnings per share of 99 cents before a 4-cent charge, vs. 78 cents, is 5 cents ahead of our view. Revenues rose 18.5% on 10% comparable Guitar Center store growth, new openings and 20% growth at Musician's Friend. Guitar Center agrees to acquire Music & Arts Center, retailer and renter of band and orchestra instruments. Pending closing conditions, the deal will add 60 retail locations to Guitar Center's 19 American Music, and is expected to be accretive to 2005 earnings per share, excluding charges. Guitar Center sees consolidated first-quarter earnings per share at 48 cents to 52 cents. We see 53 cents first-quarter earnings per share. Based on p-e-to-growth, relative PEG and discounted-cash-flow-based metrics, we would purchase.

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