After Q4 Gains, GE Still a Hold

S&P says the conglomerate's size should limit its EPS growth rate. Plus: analysts' opinions on Hewlett Packard, Xilinx, and more

General Electric (GE ): Reiterates 3 STARS (hold)

Analyst: Robert Friedman, CPA

Although GE's fourth-quarter net income based on generally accepted accounting principles (GAAP) rose 18% to $5.4 billion, we believe dilution from acquisitions reduced fourth-quarter GAAP earnings per share growth to 13%, or to 51 cents, below our 53 cents estimate. Moreover, after stripping out 4 cents of asset sale gains, 1 cent of one-time tax benefits and a penny of non-operating pension income effects, fourth-quarter S&P Core Earnings per share rose 7%, to 45 cents. Looking at what we believe are more important sustainable earnings growth prospects, we believe GE's size should prevent it from posting earnings per share growth rates greater than 10%, at best. Our discounted cash-flow-based 12-month target price for GE shares remains at $37.

Hewlett Packard (HPQ ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Hewlett Packard announced it settled all ongoing patent litigation with Intergraph Corp., a maker of mapping software, ending litigation which dated back to 2002. Under terms of the settlement, Hewlett Packard will pay $141 million to Intergraph. Hewlett Packard estimates this could trim January-quarter earnings per share by 3 cents. Our January-quarter operating earnings per share estimate remains 34 cents. The firms also entered into a patent cross licensing deal under which Hewlett Packard has access to all of Integraph's patents, while Intergraph's access to Hewlett Packard's broad portfolio is more limited. With Hewlett Packard trading at a price-to-sales of 0.8 times, below peer average, view as worth holding.

Xilinx (XLNX ): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Xilinx posted December-quarter earnings per share of 18 cents, vs. 19 cents. Excluding one time items, earnings per share of 17 cents was in line with our estimate. Revenues were down 12% sequentially, in line with lowered guidance issued on Jan. 5. Xilinx sees a 1%-5% sequential increase in March-quarter sales, flat gross margin, vs. its December-quarter, and sequentially flat operating expense levels. We are cutting our March-quarter earnings per share estimate to 18 cents from 20 cents, full fiscal 2005 earnings per share (ending March) to 86 cents from 87 cents, and fiscal 2006 earnings per share to 88 cents from 95 cents. Our 12-month target price remains $30, based on our p-e and price-to-sales analyses.

Scientific Atlanta (SFA ): Maintains 4 STARS (buy)

Analyst: Ari Bensinger

Scientific Atlanta, down in pre-market trading, posts December-quarter earnings per share of 38 cents, vs. 33 cents, a penny below our estimate, on weak set-top shipments. We note a lower-than-expected tax rate added 2 cents to earnings per share. We are encouraged that Scientific Atlanta maintained solid gross margins despite lower volume and an increased mix of higher-cost DVRs. We expect sales to rebound in the second-half of calendar year 2005, partly due to sizable set-top launches in Japan. We are lowering our fiscal 2005 (ending June) earnings per share estimate to $1.54 from $1.61, and fiscal 2006's to $1.65 from $1.75. Our 12-month target price falls to $33 from $38, 20 times our fiscal 2006 earnings per share estimate, in line with peers.

KLA-Tencor (KLAC ): Maintains 4 STARS (buy)

Analyst: Colin McArdle

Citing healthy business conditions across most geographies, KLA-Tencor reported December-quarter earnings per share of 61 cents, three cents higher than our expectation and well above the 22 cents in the year-ago period. We believe the company benefitted from some sales pulled in from the March-quarter, and we expect March-quarter earnings to decline sequentially. We are lowering our fiscal 2005 (ending June) earnings per share estimate from $2.40 to $2.29. We continue to believe sales in the second half of calendar 2005 will grow and outpace any sluggishness seen in the first half. Based upon peer group multiples, we maintain our $50 12-month target price.

Fortune Brands (FO ): Reiterates 5 STARS (strong buy)

Analyst: Howard Choe

Before unusual items, Fortune Brands posted fourth-quarter earnings per share of $1.29, vs. $1.07, 11 cents above our view. Sales rose 15%, or 11% excluding acquisitions, foreign exchange impact, and lower excise taxes. Home/hardware and spirits/wine segments led growth. We attribute strong results to product innovation, expanded distribution, and a focus on returns. Given our view of Fortune Brands's healthy outlook, we are raising our 2005 estimate to $5.20 from $5.15, 2006's estimate to $5.75 from $5.67, and our 12-month target price to $96 from $92. We view Fortune Brands as very attractive, given a 15 times current p-e, below the S&P 500 despite superior growth we see.

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