S&P Says Buy Texas Instruments
Texas Instruments (TXN ): Reiterates 5 STARS (buy)
Analyst: Thomas Smith
Texas Instruments completed the sale of the last of the 32.3 million shares of Micron Technology that it has held since it sold its DRAM plants to Micron in 1998. The net impact, along with tax effects, will add $125 million to TI's fourth-quarter net income, or about 7 cents a share. S&P views this sale as the end of an orderly multi-stage divestiture that will raise cash for new plants or other purposes. Excluding the Micron transaction, S&P estimates fourth-quarter earnings per share of 16 cents. The chipmaker also plans a mid-quarter update on Dec. 8. S&P's 12-month target price is $42, and is calculated by applying a p-e of 35 (based on S&P's 85 cents 2004 earnings per share estimate) to the $1.20 earnings per share estimate for 2005.
General Motors (GM ): Maintains 3 STARS (hold)
Analyst: Efraim Levy
GM's November vehicle sales surged 22% year-to-year. Light truck sales climbed 30% while cars advanced 13%. Ford's volume dropped 2% but Chrysler's sales advanced 3%. GM modestly increased its North American production forecast for the fourth quarter, despite a high inventory level. S&P projects industry light-vehicle sales of 16.5 million and 17.1 million units in 2003 and 2004, respectively. S&P's 12-month target price remains $47, based on a comparative p-e multiple. The company's 4.6% dividend yield adds to total returns.
IHOP (IHP ): Initiates with 3 STARS (hold)
Analyst: Dennis Milton
The operator of the International House of Pancakes restaurant chain is transitioning from company-financed development to a traditional franchise model. At 21 times S&P's 2004 earnings per share estimate of $1.83, shares trade at a premium to peers. S&P believes the premium is justified, given the significant cash flow that should be generated by the run-down of the company's financing receivables. S&P's 12-month target price of $43 is based on a discounted cash-flow model, which assumes that systemwide sales will grow at a 7% to 8% rate over the next several years.
Network Associates : Upgrades to 4 STARS (accumulate) from 3 STARS (hold)
Analyst: Jonathan Rudy S&P thinks Network Associate's core anti-virus and systems management operations should benefit from an improving corporate information-technology spending environment in 2004. S&P notes that Network shares trade at a discount to peers on an enterprise value-to-sales and on p-e-to-growth metrics. S&P believes the company's execution is improving and, with its recent re-filing of certain historical financial statements, that most of the bad news is behind it. S&P is raising the 2004 earnings per share estimate to 70 cents, from 65 cents. The 12-month target price of $18, raised from $15, is based on a blend of relative valuation metrics.
Viacom (VIA.B ): Maintains 5 STARS (buy)
Analyst: Tuna Amobi
The Wall Street Journal reported that Viacom may be close to divesting its 82% stake in vide-rental company Blockbuster. S&P says while debt-free Blockbuster's cash-flow growth has been strong, it isn't a compelling fit with Viacom's core media and entertainment assets. The third quarter was evidence that Blockbuster's rental model is increasingly threatened by DVD discounters, online rentals, and the rise of direct-to-consumer digital-delivery platforms. While the deal isn't yet certain, the suggested $2.5 billion price may fall short of fair value. S&P's 12-month target price for Viacom remains $50, on a discounted cash-flow analysis.
AT&T (T ): Maintains 3 STARS (hold)
Analyst: Todd Rosenbluth
S&P is modestly surprised that AT&T's president has left. He's being replaced by William Hannigan, former CEO of travel company Sabre Holdings. AT&T's CEO remains the same. While Hannigan has prior experience working at telecom companies, it's unclear if AT&T will stay focused on growing its local business to offset competitive pressures in its long-distance operations. S&P continues to see margin pressure and operational risks. But shares are trading below S&P's discounted cash-flow calculation and well below peers on a p-e and enterprise value/EBITDA basis, and S&P would hold the shares.
McData (MCDTA ): Maintains 2 STARS (avoid)
Analyst: Richard Stice
The data-storage company posted October-quarter earnings per share of 2 cents, vs. 2 cents, both before acquisition and amortization charges (the GAAP loss was 44 cents, vs. earnings per share of 2 cents). The results were 2 cents below S&P's estimate. Revenue declined 12% quarter over quarter. McData says the competitive environment intensified during the October quarter, largely driven by rival Cisco Systems, and resulted in longer sales cycles. S&P is reducing the fiscal 2004 (Jan.) earnings per share estimate by 8 cents, to 18 cents. Based on a revised earnings per share outlook, S&P is also lowering the 12-month target price by $2, to $7. Given McData's excessive valuation and increasing competitive threats, S&P would avoid the shares.
Walt Disney (DIS ): Reiterates 3 STARS (hold)
Analyst: Tuna Amobi
Roy Disney resigned as vice chairman on Monday. In a letter to the chairman, he cited a "ratings abyss" at the ABC network, "micromanagement," timid theme-park investments, a short-term focus, a "creative brain drain," strained relations with film and cable partners, and the lack of a clear succession plan. In S&P's view, investors have ignored this development, as most of these issues aren't new ones and Disney had unveiled an enhanced governance framework last December. Still, the ongoing board meeting could set the tone for new management and governance changes.
Analog Devices (ADI ), Cree (CREE ), Intel (INTC ), Microchip Technology (MCHP ), and Vishay Intertechnology (VSH ): Reiterates 5 STARS (buy)
Analyst: Thomas Smith
S&P remains positive on its outlook for chipmakers. The Semiconductor Industry Association reported that worldwide sales of chips in October, in U.S. dollars, on a 3-month moving average basis, are up 23.3% year-over-year and 6.8% from September. Sales rose 16.4% in 2003 to date; S&P believes the full-year 2003 forecast of 15.8% is apt to be topped. S&P sees a cyclical industry upturn that could endure for two or more years, given modest spending on capital equipment by chipmakers. since 2000.