Take-Two Interactive (TTWO ): Downgrading to 2 STARS (sell) from 3 STARS (hold)
Analyst: Jonathan Rudy, CFA
The Entertainment Software Rating Board assigned an adult-only 18+ rating for "Grand Theft Auto: San Andreas" due to unauthorized third party modification. We believe Take-Two will be negatively impacted by ceasing manufacturing of the current version of the title, in order to work on a version of the game with enhanced security to prevent modifications. We are lowering our fiscal year 2005 (October) and fiscal year 2006 EPS estimates to $1.06 and $1.26, from $1.44 and $1.50. With Take-Two's most successful franchise being adversely impacted, we would sell the shares. We are lowering our target price to $24 from $28.
eBay (EBAY ): Reiterates 3 STARS (hold)
Analyst: Scott Kessler
eBay's shares are considerably higher in pre-market trading, following second-quarter results that were materially better than we expected. eBay's U.S. and Germany marketplaces, which we consider to be two of eBay's most important businesses, generated accelerated sequential growth in gross merchandise volume. Based in part on our more favorable take on eBay's core operations, we raised our 2005 forecast to 83 cents from 80 cents, notwithstanding unfavorable foreign exchange rates. We also set a 2006 EPS estimate of $1.00. Based on revised discounted cash flow analyses, we are raising our target price to $44, from $36.
Verisign (VRSN ): Upgrading to 4 STARS (buy) from 3 STARS (hold)
Analyst: Scott Kessler
Using a 30% tax rate, Verisign posted second-quarter earnings per share of 27 cents, vs. 15 cents, 1 cent above our forecast. We are cutting our third-quarter sales forecast, based on what we see as near-term issues in Verisign's mobile content business related to seasonality, forex, and lack of new carriers/countries added in the second quarter. Even so, we are raising our 2005 estimate by 2 cents to $1.05 on our more favorable margin outlook. We are also setting our 2006 estimate at $1.34. Based on revised peer analysis, we are trimming our target price by $3 to $30. However, we see fundamentals as intact and the sell-off today as a buying opportunity.
United Parcel Service (UPS ): Upgrading to 4 STARS (buy) from 3 STARS (hold)
Analyst: James Corridore
Second-quarter earnings per share of 88 cents, vs. 72 cents, beats our 84 cents estimate. Domestic package volume was better than we expected and UPS seems to have gained international market share. UPS says the U.S. economy remains steady. Our 2005 EPS estimate rises to $3.48 from $3.46, and our 2006 estimate to $4.00 from $3.90. We think the company has overcome execution issues and regained some market share. We see its planned acquistion of Overnite as a good response to FedEx's (FDX ) freight strength. Our target price rises to $84 from $75, 21 times our 2006 EPS forecast, still at the low end of UPS's historical p-e range.
Qualcomm (QCOM ): Reiterates 4 STARS (buy)
Analyst: Ken Leon, CPA
Qualcomm posts June-quarter earnings of 28 cents, vs. 29 cents, before special items, 2 cents above our view. We think the company may have hit bottom with sales 1% lower quarter-over-quarter, as chipset shipments declined to 36 million from 37 million but average selling prices (ASPs) improved over the March quarter. We project 11%-13% annualized sales growth in fiscal year 2005 (September) through fiscal year 2007, with 35%-38% net margin, the industry's highest. Despite some delays in 3G rollout of WCDMA, we believe Qualcomm will benefit over time. We are raising our fiscal year 2005 EPS estimate to $1.15 from $1.13 and fiscal year 2006 to $1.35 from $1.30. Our target price rises to $45 from $40 on multiple metrics.
SBC Communications (SBC ): Maintains 3 STARS (hold)
Analyst: Todd Rosenbluth
We calculate that SBC's second-quarter EPS is a flat 38 cents before a one-time charge, 4 cents better than our 34 cents estimate, both inclusive of ongoing wireless integration expenses. Cingular helped to drive revenues along with strong long-distance operations. DSL additions were weaker than in the first quarter and we believe this has resulted in more aggressive pricing, which pressured EBITDA margins. However, consumer primary lines appeared relatively stable to us. We expect SBC's conference call will discuss these factors and the pending merger with AT&T, which reported last night.
AT&T (T ): Maintains 3 STARS (hold)
Analyst: Todd Rosenbluth
Before one-time charges, AT&T posts operating EPS of 62 cents, vs. 14 cents, ahead of our 53 cents estimate due to nonoperating items. Revenues were down 11.5%, slightly weaker than we expected, reflecting voice services competition. EBITDA margin was slightly ahead of our projection. We believe the local customer base has been relatively stable and see demand for AT&T's IP services as strong. We believe that by early 2006, AT&T will receive regulatory approval for its pending merger with SBC Communications. Based on the deal terms and with a 5% dividend yield, we would hold AT&T.