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S&P Raises America West Target, Keeps Hold

America West (AWA): Reiterates 3 STARS (hold)

Analyst: James Corridore

America West agreed to merge with US Airways. The companies expect combined entity to start with $2.0 billion cash, which we think is adequate. But we are skeptical of claims of $600 million in cost cuts, profits at $50 oil, and $6.12 a share equity value America West is assuming, which reflects new capital but perhaps new obligations not as much. We think the deal has appeal in creating a national low-cost carrier, and expect it to be consummated despite many hurdles. We think merger risks and integration worries are likely to weigh on the stock. Even so, we are raising our 12-month target price by $1, to $6.

Maytag (MYG): Reiterates 3 STARS (hold)

Analysts: Amy Glynn, CFA, Jason Asaeda

Maytag agrees to be acquired by Ripplewood Holdings LLC for $2.1 billion at $14 a share in cash plus the assumption of about $975 million of debt. The deal is expected to close by yearend, subject to approvals. We view Maytag's problems as twofold, as pressure from what we see as high-cost manufacturing is being exacerbated by declining revenues from an adverse mix and import competition. New ownership could serve as an impetus for Maytag to become a global low-cost producer of more innovative products. We are raising our 12-month target price to $14 from $10, based on terms of deal.

International Business Machines (IBM): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

At IBM's analyst meeting today, the company discussed factors behind its first-quarter earnings per share miss. These include lost share to Dell in the x86 server market, storage missteps, and a mismatch of skillsets in its services organization in Europe. We believe it is critical that IBM's reorganization of its services unit is quick and executed well to support the company's double-digit earnings per share growth objective over the long term. We have concerns about recent executions issues, but at a price/sales ratio of 1.3 times, in line with peer average, we view IBM shares as fairly valued.

Gap Inc. (GPS): Maintains 4 STARS (buy)

Analyst: Marie Driscoll, CFA

Gap misses our 36 cents April-quarter earnings per share estimate, reporting 31 cents, vs. 33 cents on a 4% comparable-store sales decline. Merchandise mistakes at Gap women's drove a 230 basis point gross margin contraction. Operationally, Gap continues to rationalize the Gap store fleet, and once the merchandise is right, we think this should result in nice store productivity gains. Despite the April-quarter earnings shortfall, we are maintaining our fiscal 2006 (ending January) earnings per share estimate of $1.45 after an estimated 3 cents per share on a facilities reserve reversal. This is within Gap's $1.44 to $1.48 guidance. Our 12-month target price remains $26.

Time Warner (TWX): Reiterates 4 STARS (buy)

Analyst: Tuna Amobi, CPA, CFA

Time Warner initiates a regular quarterly cash dividend of 5 cents per share, with a first payout planned in September, based on a record date to be set this summer. The move was a mild surprise to us, with the $17.6 billion Adelphia acquisition still pending. Senior management has recently faced persistent questions on use of nearly $5 billion-plus recurring free cash, as projected net debt/EBITDA of 2.00 times to 2.25 times (including Adelphia) suggests ample continued financial flexibility, in our view. With the announcement today, Time Warner joins a growing list of large media stocks that offer relatively modest dividend yields.

Brocade Communications (BRCD): Reiterates 3 STARS (hold)

Analyst: Richard Stice, CFA

Brocade posted April-quarter operating earnings per share of 7 cents, vs. 7 cents, in line with our estimate. Net revenues declined 10% quarter-over-quarter. Gross margin of 57% was 50 basis points below our model. Brocade notes that sales cycles have become elongated. We note that Department of Justice and SEC investigations into stock option grant practices are ongoing. Our fiscal 2005 (ending October) earnings per share estimate falls by 4 cents to 29 cents. However, we believe further downside risk is limited, given what we see as a viable growth opportunity in the bladed server market and a favorable capital structure that includes close to $3/share in cash and investments.

Marvell Technology (MRVL): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Following an April-quarter earnings call, we are raising our operating earnings per share estimate for the July-quarter to 29 cents from 27 cents and for fiscal 2006 (ending January) to $1.18 from $1.12. Our improved outlook is due to the April-quarter outperformance as well as our slightly higher sales and operating margin assumptions for the remainder of fiscal 2006. We think Marvell merits its premium p-e versus peers, given the above-average growth we forecast for the company. We are raising our 12-month target price for these high-beta shares by $5 to $45, based on our revised p-e and price-to-sales analyses. We would hold the stock.

VCA Antech (WOOF): Reiterates 5 STARS (strong buy)

Analyst: Markos Kaminis

Following the company's refinancing of debt, and our increase of our 2005 revenue forecast to 18% from 17%, we are raising our 2005 earnings per share estimate to 93 cents from 90 cents, and our 2006 estimate to $1.09 from $1.07. On a blend of discounted-cash-flow and p-e-to-growth-based metrics, we are raising our 12-month target price to $31 from $29. Within our discounted-cash-flow model, we continue to forecast a target debt-to-capital ratio of 30%. We expect 13% average annual free cash flow growth over 10 years and a weighted-average cost of capital of 8.5%. We view VCA Antech's growth potential within its fragmented market appealing.

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