Marsh & McLennan (MMC ): Upgrades to 3 STARS (hold) from 1 STAR (sell)
Analyst: Gregory Simcik, CFA
Marsh & McLennan outlines a new insurance broker business model, designed to protect market position. Changes to be implemented by Jan. 2005 include the permanent worldwide elimination of contingent commissions and transparency for clients of commissions and underwriter negotiations. We still believe current industry turmoil may lead to higher competition for client accounts and are skeptical that Marsh & McLennan can easily replace lost contingents with increased commission rates. We are also concerned by the possibility that some commission rates could be lowered as part of a settlement remedy.
PeopleSoft (PSFT ): Reiterates 3 STARS (hold)
Analyst: Jonathan Rudy, CFA
The European Commission today cleared the proposed acquisition of PeopleSoft by Oracle, saying the $7.7 billion cash tender did not violate antitrust laws. The deal was approved without conditions. While we think this removes the last regulatory hurdle to the transaction, there remain notable barriers, such as PeopleSoft's poison pill and customer assurance program, in addition to the company's outstanding suit against Oracle for $1 billion in damages. But trading at a discount to peers on an enterprise value/sales basis, we would hold PeopleSoft, despite the ongoing distraction of Oracle's hostile offer.
Broadcom (BRCM ): Maintains 3 STARS (hold)
Analyst: Amrit Tewary
Broadcom announced that Scott A. McGregor, currently president and CEO of the Philips Semiconductors division of Royal Philips Electronics, will replace Alan Ross as the company's President and CEO, effective January 3, 2005. At that time, Mr. McGregor will also take a place on Broadcom's board. We believe Mr. McGregor's more than six years of high-level management experience at Philips should make his transition to Broadcom easier. We would hold Broadcom shares, as we think the stock price fairly reflects our concerns about moderating growth and the company's relatively low earnings quality.
Flextronics International (FLEX ): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)
Analyst: Richard Stice, CFA
Flextronics posted September-quarter earnings per share 17 cents, before amortization and restructuring charges, vs. 9 cents, in line with our estimate. Net sales increased 7% sequentially, aided by strength in computers and office automation segment. But the company says consumer and communications end-markets are softer than expected. As a result, we are reducing our fiscal 2005 (Mar.) earnings-per-share estimate by 5 cents to 68 cents, and our 12-month target price by $3 to $14. However, we believe Flextronics remains attractive, given our view of its favorable industry position and improving operating leverage.
Halliburton (HAL ): Reiterates 3 STARS (hold)
Analyst: Stewart Glickman
Beating our estimate by 3 cents, Halliburton posted third-quarter earnings per share of 39 cents, before a 6-cent asset sale gain, a 3-cent one-time charge and a 51-cent loss on discontinued operations, vs. year-ago earnings per share of 21 cents. Results benefitted from strong margins in energy systems, and despite operating losses in the KBR unit. The company has cut its working capital in the unit, which we see as positive move. Halliburton is priced at 8.7 times our 2005 EBITDA estimate, below peers, and at discount as well on ratios of price to cash flow, but seems fairly valued to our discounted-cash-flow model. Blending the measures, our 12-month target price rises $5 to $38.
T. Rowe Price (TROW ): Reiterates 4 STARS (accumulate)
Analyst: Robert Hansen, CFA
T. Rowe Price's third-quarter earnings per share of 62 cents, vs. 51 cents, is below our 63 cents estimate. Results were helped by a 2.5% sequential rise in assets under management to $212 billion, reflecting net inflows of $5.8 billion. We see strong inflows into T. Rowe's higher-margin equity funds in 2005, given our view of their strong relative performance. We are lowering our 2004 earnings per share estimate to $2.41 from $2.42, but raising 2005's to $2.80 from $2.75. Our 12-month target price stays at $60, about 21 times our 2005 earnings per share estimate, above peers but near historical average. We would accumulate T. Rowe given our view of its strong competitive advantage.
American Express (AXP ): Maintains 3 STARS (hold)
Analyst: Evan Momios, CFA
American Express posted third-quarter earnings per share of 69 cents, vs. 59 cents, 3 cents above our estimate. Results reflect strong cardmember spending and credit quality trends. We view American Express as a leading global consumer finance franchise that should sustain its above-average profitability in an improving economy. In terms of earnings per share growth, we view 2004 as an above-trend year and expect 2005 to be more in line with the company's long-term goals. We are raising our 2004 earnings per share estimate by 3 cents to $2.73, and keeping 2005's at $3.05. Our 12-month target price remains $56, or 18.3 times our 2005 earnings per share estimate.