S&P: Still Hold Yahoo! after Musicmatch Deal

Yahoo! (YHOO ): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Yahoo announced the proposed purchase of Musicmatch, a provider of personalized music software and services, for some $160 million. Musicmatch offers jukebox software allowing customers to play, burn, download, discover and organize music; a radio network consisting of stations and songs; and a music download store that provides access to more than 700,000 tracks. We expect the proposed deal to close by year-end, pending necessary approvals, and believe it would substantially augment Yahoo's reach and services in the music category. Our 12-month target price on the shares, based on our discounted cash-flow analysis, remains $33.

Computer Sciences (CSC ): Upgraded to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Stephanie Crane

Our upgrade is based on our more favorable view of momentum in the IT services industry, a more positive outlook for the company's fundamentals, and what we regard as an attractive valuation. At recent investor conference, Computer Sciences highlighted its stability in the consulting, as well as momentum in the outsourcing, markets despite some hesitation by corporate chief information officers to spend discretionary funds. We are raising our target price to $60 from $50, based on a p-e multiple of 19 times our fiscal 2005 EPS estimate of $3.19. The stock currently trades at 15 times our fiscal 2005 estimate, well below levels for the S&P 500 and the company's industry peers.

Sun Microsystems (SUNW ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Sun disclosed in its recent 10-K filing that its fourth-quarter (ended June) earnings per share were reduced by about one cent compared with its previously reported EPS of 24 cents (Sun posted a 5-cent loss on an operating basis) due to a revision in accounting for its settlement with Microsoft and to reflect asset impairment obligations from leased facilities. However, the Microsoft settlement and impairment obligations were not included in our model, which is based on operating results, and so, there is no change to our fiscal 2005 operating estimate of breakeven. At a price-to-sales ratio of 1.2, in line with its peers, and with cash and investments of $7.5 billion, we think Sun shares are worth holding.

Cardinal Health (CAH ): Reiterates 1 STARS (sell)

Analyst: Phillip Seligman

Cardinal sees first-half fiscal 2005 (ending June) earnings per share down 10% to 15%, with September-quarter EPS down 25%, on drug price hike delays and a fee-for-service shift. The company also asked the SEC for a 15-day extension to file its fiscal 2004 10-K and plans to restate net earnings for fiscal 2002 up $10.8 million, fiscal 2003 down $26.8 million, and fiscal 2004's first 9 months down $12.4 million. While restatements are modest relative to total earnings, we are concerned by corporate governance and problems in the drug distribution model. We are lowering our fiscal 2005 EPS estimate by 33 cents to $3.55, but are keeping our target price at $38, representing a sizable p-e discount to peers based on our fiscal 2005 estimate.

Moody's Corp. (MCO ): Reiterates 4 STARS (accumulate)

Analyst: William Donald

We regard Moody's as attractive, based on our view of a strong balance sheet, consistently wide operating margins, and heightened global growth opportunities. We are raising our 12-month target price to $81 from $77 based on our discounted cash-flow calculations, which assume a weighted average cost of capital of 10.5% and a 10-year average free cash flow growth rate of 13%. We expect Moody's, which currently trades at 26 times our 2004 EPS estimate of $2.75, to continue to trade at a premium p-e multiple to the S&P 1500. We project EPS of $3.10 for 2005, and tentatively project $3.70 for 2006.

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