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S&P Positive on HP-Peregrine Deal

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

Analyst: Megan Graham-Hackett

We view HP's plan to buy Peregrine Systems for $26.08 per share in cash, subject to customary conditions, as a strategic positive. At 2.2 times sales, we see the purchase price as reasonable, given recent consolidation in the software market. We believe Peregrine's software for asset tracking and process automation will be a good addition to HP's software portfolio, but we see successful integration as key, and strides in improving profitability in this segment as critical. No change to our estimates; and at a below peer-average price/sales of 1 times, we view HP as worth holding.

Altiris (ATRS): Maintains 3 STARS (hold)

Analyst: Zaineb Bokhari

We view Hewlett-Packard's proposed acquisition of Altiris competitor Peregrine Systems as negative for Altiris. HP contributed 20% of Altiris's June quarter revenue, down from 31% in 2004. We believe this acquisition could further limit HP's contribution. We think Altiris will continue to make strategic acquisitions to offset declines in its organic revenue growth. But, we believe this will limit operating margin expansion while adding to revenue. We continue to believe Altiris is a potential acquisition target. We are maintaining our earnings per share estimates and target price of $15.

Cisco Systems (CSCO): Reiterates 4 STARS (buy)

Analyst: Ari Bensinger

After reviewing its 10-K filing, we concur with Cisco's expectations for a fiscal year 2006 (ending July) stock option expense of 12 cents to 14 cents per share under Financial Accounting Standards Board 123, which became effective for all annual periods beginning after June 15, 2005. Our fiscal year 2006 S&P Core earnings per share estimate remains 92 cents, which forecasts 14 cents of stock option expense. The absolute negative impact of stock options on fiscal year 2006 operating earnings stands at 13%, which compares favorably to the peer average of roughly 20%. We expect cumulative stock buybacks to continue to dramatically exceed exercises of stock options in the same period.

Nike (NKE): Reiterates 4 STARS (buy)

Analyst: Marie Driscoll, CFA

Nike posted $1.61 vs. $1.21 August quarter earnings per share, beating our $1.41 estimate, and driven by worldwide footwear sales including an 11% gain in the United States. U.S. apparel rose 1% and 10% on a like basis. China drove Asia/Pacific's 13% gain. The company's gross margin expanded 80 basis points, despite air freighting of the product to chase demand. SG&A fell 150 basis points as Nike reduced its demand creation expense, pushing some into the November quarter, when SG&A is expected to rise about 15%. Our fiscal year 2006 (ending May) earnings per share estimate rises to $5.22 from $5.00, and fiscal year 2007's to $5.69 from $5.60. Our $105 target price is 20 times our calendar 2006 earnings per share estimate of $5.35.

TBC (TBCC): Maintains 3 STARS (hold)

Analyst: Michael Souers

TBC announced that Sumitomo Corporation of America has entered into a definitive agreement to acquire TBC for $35.00 per share in cash, for a total transaction value of $1.1 billion, including debt. While this proposed transaction is subject to shareholder and regulatory approval, we see the likelihood of approval as high, and we expect the deal to close by year-end. As a result of this announcement, we are increasing our 12-month target price to $35 from $30, or about 14.5 times our 2006 earnings per share estimate of $2.44.

RealNetworks(RNWK): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

RealNetworks announced the availability of its Rhapsody Radio service to certain Sprint Nextel (S) wireless users. Sprint PCS customers will have access to RealNetworks's streamed radio content, podcasts and music news and videos for $6.95 a month. We believe this news is a positive development in RealNetworks's increasing pursuit of new subscription and mobile opportunities; Sprint is the third-largest wireless carrier in the U.S. However, notwithstanding RealNetworks's varied offerings and technology, we believe its markets are already extremely competitive and becoming more challenging.

Carnival (CCL): Reiterates 4 STARS (buy)

Analyst: Thomas Graves, CFA

Before special charges, third quarter earnings per share of $1.41 vs. $1.22 is 5 cents above our estimate. Higher passenger spending and operating efficiencies helped to more than offset higher fuel costs. We are raising our fiscal year 2005 (ending November) earnings per share estimate to $2.67 (now including 5 cents of third quarter charges) from $2.65, and keeping our fiscal year 2006 estimate of $3.05. This includes a relatively modest adverse impact related to Hurricane Katrina. We expect shares of this industry leader to receive a premium p-e valuation to the S&P 500 (now about 18%, based on calendar year 2005 earnings per share estimates. Our 12-month target price remains $59.

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