Morgan Stanley (MWD ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)
Analyst: Robert Hansen, CFA
Although we think Morgan Stanley lacks competitive advantage in its smaller brokerage, asset management, and credit card businesses, we think the company's institutional securities business, its largest segment, will benefit from a favorable interest rate environment and increased advisory activity. We are leaving our EPS estimates unchanged at $4.40 for fiscal 2004 (ending November) and $4.60 for fiscal 2005. Our 12-month target price stays at $55, 12 times our fiscal 2005 EPS estimate, a discount to peers and to Morgan Stanley's 10-year historical average of 14 times. Trading at 10 times our fiscal 2005 EPS estimate, we would accumulate the shares.
DirecTV (DTV ): Maintains 4 STARS (accumulate)
Analyst: Tuna Amobi, CPA, CFA
In a second-quarter conference call, DirecTV said key second-half goals include strong subscriber growth, supported by aggressive marketing of digital-video recording and high-definition TV offerings. Separately, we think that the recent satellite failure at 81%-owned PanAmSat could jeopardize PanAmSat's pending $4.3 billion sale to a private group. Still, with a $1.8 billion cash balance, we see ample DirecTV funding for a pending $875 million acquisition of the satellite unit of Pegasus. We maintain our 6 cents and 50 cents earnings per share estimates for 2004 and 2005. Our 12-month target price is $21, based on our view of a warranted premium to peer Echostar.
Univision Communications (UVN ): Maintains 4 STARS (accumulate)
Analyst: Tuna Amobi, CPA, CFA
After revisiting our relative valuation models, we are raising our 12-month target price on Univision by $4 to $40. After retreating 25% in 2004, Univision stock has recovered 17% in the last two days, after beating high expectations with its second-quarter results. Based on revised 2005 estimates, the stock now trades at 1.6 times p-e-to-growth, 30 times estimated free cash flow and 19 times enterprise value-to-EBITDA. While these represent sizable premium multiples to its broadcast peers, we see additional potential upside with what we view as management's conservative third-quarter guidance, given strong ratings from Copa America, and current demographic shifts.
Emulex (ELX ): Maintains 3 STARS (hold)
Analyst: Richard Stice, CFA
Storage-area network provider Emulex posted June-quarter earnings per share of 19 cents, vs. 23 cents, 1 cent above our lowered estimate. Revenues declined 13% from the March quarter as Emulex was negatively impacted by a key customer's impending shift to a hub-based inventory model. Gross margin of 62.7% exceeded our 61% estimate, aided by less aggressive price cuts. We're lowering our fiscal 2005 (June) earnings per share estimate by 18 cents, to 71 cents, and our 12-month target price by $3, to $12. Despite soft end-market demand and poor visibility that we see, we think a favorable industry position and a net cash balance in excess of $1.50 per share warrants holding present positions.
Sempra Energy (SRE ): Reiterates 3 STARS (hold)
Analyst: Craig Shere, CFA
Energy-services provider Sempra posted second-quarter earnings per share of 52 cents, vs. 55 cents, 13 cents below our estimate. Results include a 4-cent litigation reserve and seasonally lower contracted wholesale-power sales. We're raising our 2004 and 2005 earnings per share estimates by 5 cents to $3.10 and $3.15, respectively. Our 2004 estimate is effectively at the mid-point of Sempra's guidance (which includes a 14-cent year-to-date loss from discontinued operations). Given its trading revenue, we see Sempra is fairly valued at its current 2005 p-e discount vs. peers. We expect appreciation in line with our view of 5% long-term earnings per share growth and raise our 12-month target price to $38 from $37.