S&P Lowers Cisco Systems to Buy

Fannie Mae stays at hold on news it's delaying SEC filings, plus opinions on Time Warner, Disney, and more

Cisco Systems (CSCO ): Downgrading to 4 STARS (buy) from 5 STARS (strong buy)

Analyst: Ari Bensinger

Cisco posts July-quarter earnings per share of 25 cents, vs. 21 cents, in line with our estimate, on 7% sequential sales growth. Cisco guides October-quarter sales flat to down moderately on a sequential basis, in line with our model. We believe Cisco's large revenue base is beginning to hamper potential sales growth, which, in our view, will limit the stock's potential multiple expansion. We also do not see any material catalysts on the horizon given our forecast for a backend loaded fiscal year 2006. We are lowering our fiscal year 2006 (July) EPS estimate by 3 cents to $1.06. Based on revised peer analysis, we are reducing our 12-month target price by $3 to $23.

Fannie Mae (FNM ): Maintains 3 STARS (hold)

Analyst: Jason Seo, CFA; Gregory Simcik, CFA

Fannie Mae tells the SEC it will not file its second-quarter 10-Q on time and that it believes its 2004 10-K, including previously announced financial restatements, will not be complete prior to the second half of 2006. Though we see sound fundamentals for Fannie Mae long-term, we believe investor risk remains high, and a longer delay for restatements, as well as considerable resources devoted to reviewing past accounting, could lead to more complex revisions of past results. As a result, we would not add to positions. Our 2005 estimate stays at $7.50, and our 12-month target price at $67, 9 times our estimate, below peers.

Time Warner (TWX ): Reiterates 4 STARS (buy)

Analyst: Tuna Amobi, CPA, CFA

Time Warner is trading on heavier volumes, we think in reaction to unconfirmed CNBC and The Wall Street Journal reports that investor Carl Icahn is lining up a group, possibly including cable pioneer and Time Warner director Ted Turner, to force a breakup of the media giant. We would not dismiss the news entirely, given Time Warner's modest takeover defenses and Icahn's past corporate maneuvers. Still, despite a mixed second quarter, we see strategic progress at Time Warner, as it moves toward a cable IPO on the heels of new $5 billion stock buyback program. With over $86 billion of market cap, vs. Icahn's 0.1% stake, leverage to trigger a major proxy battle is minimal, in our view.

Walt Disney (DIS ): Reiterates 4 STARS (buy)

Analyst: Tuna Amobi, CPA, CFA

Before one-time items, June-quarter earnings per share of 42 cents, vs. 31 cents, is 4 cents above S&P and Street estimates. The third quarter rode a solid ESPN and rebounding ABC, plus improved traffic and margin expansion at U.S. parks, and we think all should continue through at least fiscal year 2006 (September). September-quarter film results could be pressured by theatrical marketing costs on accelerated Miramax titles, but these should later drive incremental contributions to home video and pay TV. Disney confirms at its June-quarter call that it is mulling strategic options for radio assets (ex-Radio Disney/ESPN Radio), which we think could fetch over $3 billion.

American International Group (AIG ): Reiterates 3 STARS (hold)

Analyst: Catherine Seifert

AIG posts $1.46, vs. $1.06, second-quarter earnings per share, after a FAS 133 gain of 32 cents, vs. a loss of 4 cents. Results before FAS 133 were below our $1.22 estimate. We believe today's share strength is a "relief rally" as AIG posts top-line growth and profitable underwriting. But we note that 4.2% second-quarter written premium growth and an expense ratio of 22.2% are not materially better than the industry average. We note AIG's global franchise, but believe that a "reversion to the mean" could hurt the company's margins ahead. We are raising our target price to $70 from $64, 12.7 times our $5.50 2006 estimate, above peers.

Whirlpool (WHR ) and Maytag (MYG ): Maintains 3 STARS (hold)

Analyst: Amy Glynn, CFA

Whirlpool raises its offer to acquire Maytag to $21 a share, up from Monday's $20. Whirlpool's offer expires Aug. 20, one day after Maytag holders vote on a $14 Ripplewood offer. Maytag has not yet commented on the Whirlpool bid, but at a 50% premium to Ripplewood's offer, we think shareholders would be willing to take on regulatory approval risks. As a result, we would expect them to vote against the Ripplewood offer. We think Whirlpool would benefit from the potential merger over the long term, but have concern about possible integration issues and costs. Our 12-month target price for Whirlpool stays $85. On the sweetened offer, we are raising our 12-month target price for Maytag by $1 to $21.

SanDisk (SNDK ): Downgrades to 2 STARS (sell) from 3 STARS (hold)

Analyst: Richard Stice, CFA

SanDisk shares have risen close to 40% in the past month and now exceed our upwardly revised 12-month target price of $32. We believe the expansion of the consumer electronics market provides significant growth opportunities for flash-related storage. However, we see competition in this sector intensifying, which in our view will increase volatility and result in a more pronounced decline in the average price per megabyte sold. Our target price is derived via a combination of discounted cash flow and relative p-e analysis, which equates SanDisk to the S&P Computer Storage & Peripherals sub-industry.

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