S&P Says Hold Gateway

Plus: analysts' opinions on Nextel and National Semiconductor. Plus more

Gateway (GTW ): Maintains 3 STARS (hold)

Analyst: Megan Graham-Hackett

Gateway agreed to repurchase its Series A and C preferred stock and up to 2.7 million common shares from AOL Time Warner (AOL ) for a total of $315.6 million. The price will include $185.6 million in cash, plus a reduction of up to $130 million of payments for certain revenue-sharing payments AOL would have had to make to Gateway under their alliance. At third-quarter end, Gateway had $660 million in cash and investments, and it has set a $200 million 5-year revolving credit facility. We believe this transaction will resolve a long-standing question regarding Gateway's balance sheet. With its shares trading below peers at price/sales of 0.6 times, we view Gateway as worth holding.

Nextel Communications (NXTL ): Reiterates 5 STARS (buy)

Analyst: Kenneth Leon, CPA

We think the shares should react favorably to Nextel's agreement with Verizon Wireless to resolve all of their legal disputes. Most important, we think, is Verizon Wireless cooperation not to oppose the FCC's decision to realign the 800 MHz band and move Nextel to the 1.9 GHz, at an estimated cost of $3.2 billion. We had viewed the spectrum swap as a risk to Nextel's outlook, with potential legal delays. Nextel has given Verizon Wireless the right to use the phrase "Push To Talk," which we view as immaterial to Nextel's Direct Service. Priced at 14.5 times our 2005 earnings-per-share estimate and below peers, we would buy Nextel.

National Semiconductor (NSM ): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

National Semiconductor expects November-quarter sales to be down 18% to 19% from its August-quarter, worse than previous guidance of down 8% to 10%. The company is seeing weaker-than-expected turns orders as customers continue to aggressively reduce inventory levels. National Semiconductor also lowered its gross margin outlook for the quarter to 49% to 50% from its original guidance of about 51%. We are cutting our November-quarter earnings-per-share estimate to 14 cents from 21 cents, our fiscal 2005 (May) estimate to 82 cents from $1.05, our fiscal 2006 estimate to 88 cents from $1.20, and our 12-month target price to $17 from $18, based on p-e and price/sales analyses.

Dynegy (DYN ): Reiterates 3 STARS (hold)

Analyst: Yogeesh Wagle

Dynegy agreed to acquire a 1,042-megawatt combined-cycle power generation facility and four natural gas-fired merchant facilities in New York, four hydroelectric generation plants in Pennsylvania, and a 750-megawatt capacity sales agreement. The price will be $135 million cash and the assumption of $919 million in debt. We think the purchase, subject to closing conditions, could provide upside in an improving power generation market. It will also allow exit from one of three remaining money-losing tolling contracts. Still, given the potential we see for equity dilution as Dynegy reduces debt, we would not add to positions.

May Department Stores (MAY ): Maintains 3 STARS (hold)

Analyst: Jason Aseada

May Department Stores posted a 2.3% same-store sales decline for October, on top of last year's 4.2% decrease. While we are somewhat disappointed by the recent weakness in sales momentum, we still believe that turnaround initiatives are slowly gaining traction, and we look for a greater payoff in fiscal 2006 (Jan.). That said, with October-quarter sales of $3.5 million, vs. our $3.6 million estimate, and the company facing more difficult historical sales comparisons over the next six months, we are trimming our fiscal 2005 earnings-per-share estimate by 10 cents to $2.16, and our fiscal 2006 by 3 cents to $2.47. Our 12-month target price remains $28.

Teradyne (TER ): Maintains 3 STARS (hold)

Analyst: Colin McArdle

Reflecting higher valuations among relevant peers, we are increasing our 12-month price target to $18, from $15, and maintaining our hold recommendation on this high-beta stock while we wait for channel inventories to be fully digested for semiconductor manufacturers. Capitalizing our 2005 earnings-per-share estimate of 65 cents at a peer-group multiple of 28 times leads to our revised target price. We look for demand to pick up again in the second-half of 2005 and believe Teradyne will maintain profitability throughout next year, based on aggressive cost cutting efforts.

Playboy Enterprises (PLA ): Reiterates 3 STARS (hold)

Analyst: William Mack, CFA

Playboy posted third-quarter earnings per share of 6 cents, vs. a loss of 3 cents, ahead of our 2 cents estimate. A wider-than-expected operating profit margin easily offset an 8% revenue increase, which was below our 10% forecasted rise. We are increasing our 2004 earnings-per-share estimate by 2 cents to 7 cents, and our 2005 projection remains 15 cents, driven by our expectation of a price increase at the flagship magazine and the anticipated signing of an additional video-on-demand deal. We are raising our 12-month target price, which blends discounted cash flow and enterprise value-to-EBITDA methodologies, to $13 from $12.

Tenet Healthcare (THC ): Maintains 2 STARS (avoid)

Analyst: Cameron Lavey

Tenet Healthcare posted a third-quarter loss of 11 cents, vs. a loss of 44 cents, 3 cents worse than our view. Results were hurt by a 2.9% fall in same-facility admissions and a 5.0% decline in same-facility surgeries. A bad debt expense of 10.4% would have been 13.8% without new uninsured discount policies. In addition to difficult industry conditions, we believe that Tenet faces additional firm-specific challenges, including managed-care pricing and litigation exposure. We are widening our 2004 operating loss estimate by 5 cents, to 17 cents and cutting 2005's earnings-per-share estimate by 6 cents, to 15 cents. Our 12-month target price stays at $9.

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