Qualcomm (QCOM ): Upgrading to 3 STARS (hold) from 2 STARS (avoid)
Analyst: Kenneth Leon CFA
We expect QCOM shares to be supported by prospects for a stronger U.S. economy and a rising demand for CDMA handsets in China, India, and Korea. We maintain our 86 cents fiscal year 2003 (ending September) estimate and raise our fiscal year 2004 estimate to 95 cents from 93 cents, with a higher chipset forecast. We are raising our 12-month target price to $40 from $36, based on discounted cash flow analysis, but our below-the-market target price underscores our more cautious view about QCOM's long-term growth. With shares trading above peers on most valuation metrics, we would hold, but not add to postions.
Park Place Entertainment (PPE ): Upgrading to 3 STARS (hold) from 1 STAR (sell)
Analyst: Tom Graves, CFA
We expect PPE shares to be bolstered by prospects for a stronger U.S. economy, development of Native American casinos managed by PPE, and free cash flow after the Caesars Palace building project is completed. Our 12-month target price of $10 reflects our view that the longer-term growth outlook for PPE will support, based on 2004 estimates, both a premium p-e, and an enterprise value at 7.2 times EBITDA that is less of a discount to peers than we previously projected.
Convergys (CVG ): Keep 4 STARS (accumulate) and Raise Target Price
Analyst: Todd Rosenbluth
We believe customer care and billing provider CVG has stronger fundamentals and less customer migration risk than its peer CSG Systems (CSGS ), and we continue to favor CVG. We see third-quarter operating EPS of 30 cents for CVG and also believe that the company is poised to benefit as CSGS's difficulties with top customer Comcast (CMCSA ) unfold. CVG shares are worth $24 on our discounted cash flow basis and we believe the shares should trade at least at an 2004 p-e of 18 times, as are its peers. Thus, we are raising our 12-month target price to $23 from $21.
Yahoo! (YHOO ): Keeping 3 STARS (hold)
Analyst: Scott Kessler
Third-quarter earnings per share of 10 cents, vs. 5 cents a year ago, is 1 cent above our and Street estimates. Revenues rose 43%, paced by a 44% rise in marketing services, which reflected a rebound in online advertising marked by continued activity from blue-chip companies. We believe the purchase of Overture Services will enable Yahoo to capitalize further on opportunities in online marketing, particularly in sponsored search. We are raising our 2003 EPS forecast by 1 cent to 38 cents, and 2004 by 4 cents to 52 cents. Based on our new free cash flow projections, we are raising our 12-month target price to $40 from $33.
Computer Associates (CA ): Keeping 3 STARS (hold)
Analyst: Jonathan Rudy, CFA
CA announces preliminary results of an independent inquiry by it's board audit committee, asking 3 executives, including CFO, to resign because of the timing of recognition of certain revenues in FY 00 (Mar.). This news is related to CA's old business model and we view it as historical in nature. We believe CA has made progress in its corporate governance since then. With an SEC inquiry outstanding, we would not add to positions. But with expected improving execution, and shares trading in line with peers at an enterprise value to sales of 5.4X, we hold positions.
Children's Place Retail Stores (PLCE ): Upgrading to 3 STARS (hold) from 2 STARS (avoid)
Analyst: Mark Basham
PLCE reports that September same-store sales rose 30%, a reversal of the 30% same-store decline reported last September. Although sales likely received a significant boost from tax cuts, we think the company's September performance represents a more permanent stabilization in its merchandising efforts. PLCE seems to have finally found the right merchandise/price balance. We are raising our fiscal year 2004 (ending January) EPS estimate to 55 cents from 47 cents and fiscal year 2005 to 75 cents from 70 cents. Based on an expected incremental boost to free cash flow, we are raising our 12-month target price to $21 from $17.