S&P Says Buy Microsoft

Microsoft (MSFT ): Reiterates 5 STARS (buy)

Analyst: Jonathan Rudy

Microsoft posted December-quarter operating earnings per share of 34 cents, vs. 26 cents -- 6 cents higher than S&P's estimate. Revenue rose 19%, to $10.15 billion, above S&P's estimate of $9.74 billion. The software behemoth benefited from stronger-than-expected corporate and consumer PC demand, which drove 27% growth in the Microsoft Office unit and 21% growth in the Windows unit. Unearned revenue was mildly disappointing to S&P, with a $395 million decline from the September quarter. However, S&P is raising the fiscal 2004 (Jun.) operating earnings per share estimate to $1.18, from $1.12, and sees $1.28 earnings per share in fiscal 2005. With shares trading at a price-earnings of 23, based on S&P's calendar 2004 estimate of $1.20 -- below peers -- S&P would continue to buy Microsoft.

Fortune Brands (FO ): Maintains 5 STARS (buy)

Analyst: Howard Choe

Excluding unusual items, the consumer brands company posted fourth-quarter earnings per share of $1.07, vs. 91 cents, which was 4 cents above S&P and the Street's estimates. Sales rose an impressive 9%, led by home/hardware and golf sales (excludng a 4% benefit from acquisitions and a 3% benefit from favorable foreign exchange). Operating income grew 19%. S&P is raising the 2004 earnings per share estimate to $4.32, from $4.28. Also, S&P is raising the 12-month target price to $87, from $83, due to Fortune's strong trends and outlook. Given S&P's view that company is well poised to continue generating strong earnings per share growth and attractive returns, S&P sees Fortune as attractively valued at a 14% discount to the S&P 500.

Boeing (BA ): Reiterates 5 STARS (buy)

Analyst: Robert Friedman

S&P continues to recommend that investors disregard the latest financial press headlines. According to these reports, Boeing is set to suffer heavily from the British government's decision to go with Europe's Airbus military tanker in a close to $24 billion contract. First, S&P had already discounted the possibility that Boeing would lose the contract to its largest rival, as S&P believes many military procurement decisions are based on political considerations, which could apply to this situation. Second, S&P regards the contract size mentioned as too high. S&P's 12-month target price remains $50 a share, based on S&P's discounted cash-flow analysis.

Union Planters (UPC ): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Erik Eisenstein

Bank holding company Union Planters agreed to merge with Alabama-based Regions Financial. The transaction is planned for closing in mid-2004, subject to approvals, with each Union Planters share to be converted into one share of the new, combined company, and each Regions shareholder receiving 1.2346 of the new company shares. In S&P's view, Regions is the effective acquiror. S&P believes the deal is likely to be consummated, and is raising the 12-month target price for Union Planters to $32, from $25 -- reflecting S&P's current 12-month target price of $40 on Regions and the agreed-upon conversion ratios.

KLA-Tencor (KLAC ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Richard Tortoreillo

The chip-gear maker posted December-quarter earnings per share of 23 cents, vs. 15 cents, on a 1% sales rise -- 3 cents above S&P's estimate. Bookings surged 49% from the September quarter, and KLA sees a 15% or more rise in the March quarter. S&P sees KLA's report as confirmation that customers (chipmakers) have accelerated plans to add both 200mm and 300mm production capacity in 2004. S&P is raising the fiscal 2004 (June) earnings per share estimate by 16 cents, to $1.16, and fiscal 2005's by 30 cents, to $2.00. S&P also is raising the 12-month target price to $72, from $60. giving the shares a p-e of 25 (based on S&P's cycle-peak earnings per share estimate of $2.85).

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