American International Group (AIG): Upgrades to 3 STARS (hold) from 2 STARS (sell)
Analyst: Catherine Seifert
AIG announces that Chairman Maurice Greenberg is set to retire, effective this week. Frank Zarb, lead director of AIG's board, is expected to assume the role of chairman. We believe shares will likely be buoyed by this news, since it moves resolution of this issue along. We are encouraged, but not surprised, by the move. Still, we hesitate to make a commitment to the shares until better quantification of the numerous regulatory investigations currently underway emerges. We are raising our 12-month target price to $62 from $54, a peer-average of 12 times our $5.20 2005 earnings per share estimate.
MCI (MCIP): Maintains 3 STARS (hold)
Verizon Communications (VZ): Maintains 4 STARS (buy)
Qwest Communications (Q): Maintains 2 STARS (sell)
Analyst: Todd Rosenbluth
According to unconfirmed press reports, MCI has accepted a raised bid from Verizon to merge. Verizon's latest stock-and cash bid of $23.50 a share reportedly includes a higher cash component than before and some downside protection to Verizon shares, though the terms still remain somewhat unclear to us. MCI chose to accept a lower offer than the one received from competing bidder Qwest. We will provide an update after hearing from the companies, but we expect Qwest to continue to pursue MCI by appealing to its shareholders.
HCA Inc. (HCA): Upgrades to 4 STARS (buy) from 3 STARS (hold)
Analyst: Cameron Lavey
HCA announces preliminary first-quarter earnings per share of 88 cents to 93 cents, well ahead of our 71-cent estimate, citing higher patient volumes, better expense control and bad debt, and a lower share count as reasons for the upside. The company also plans to divest 10 hospitals in 2005. We think industry trends are improving, including lower levels of self-pay admits, and we expect HCA to raise 2005 guidance when it reports it first quarter. We are raising our 2005 earnings per share estimate by 45 cents to $3.30, and 2006's earnings per share estimate by 39 cents to $3.60. We are also raising our target price by $15 to $60, 18 times our 2005 earnings per share estimate, in line with peers.
Microsoft Corp. (MSFT): Reiterates 5 STARS (strong buy)
Analyst: Jonathan Rudy, CFA, Megan Graham-Hackett
Microsoft and the European Union agree that the company may sell a stripped-down version of its Windows XP operating system called Windows XP Home Edition N, which does not include Windows Media Player audiovisual player. Microsoft has accepted all the main changes to the operating system requested by the EU, but we don't expect this version of Windows XP to be available for several months. We continue to advise purchase of Microsoft shares, which are trading well-below our discounted cash flow-derived 12-month target price of $33, and on which we continue our strong buy recommendation.