S&P Says Buy Microsoft

Microsoft (MSFT ): Maintains 5 STARS (buy)

Analyst: Jonathan Rudy, CFA

According to the Financial Times, the European Union has rejected Microsoft's offer to settle its anti-trust case by putting competitors' software on CD-ROMs sold with computers. While disappointing for Microsoft shareholders, S&P believes the proposal demonstrated the company's eagerness to settle outstanding litigation. With its shares trading at a discount to peers at 22 times S&P's calendar 2004 earnings per share estimate of $1.20 and with S&P's belief that concern over EU issues are already reflected in Microsoft's stock price, S&P sees upside potential once the matter is resolved by an EU decision, which is expected in March.

AT&T Wireless (AWE ): Maintains 3 STARS (hold)

Analyst: Kenneth Leon, CPA

Cingular's $15 cash per share offer, or $41 billion, is a significant premium to S&P's estimate of an $11 to $12 enterprise value for AT&T Wireless, though S&P believes Cingular may be able to achieve the cost synergies that another prospective buyer may not. S&P thinks the planned acquisition may take the rest of 2004 to meet regulatory approvals, and in the meantime, S&P doesn't see any financial benefits to AT&T Wireless's near-term operating results as a stand-alone carrier. S&P is raising the 12-month target price to $15, from $11, but with shares near peers at 2.2 times the 2004 sales estimate, S&P would not add to holdings.

Provident Financial (PFGI ): Upgrades to 5 STARS (buy) from 4 STARS (accumulate), and National City (NCC ): Reiterates 5 STARS (buy)

Analyst: Evan Momios, CFA

S&P thinks the acquisition announced today, pending necessary approvals, of Provident for about $2.1 billion will prove positive for National City shareholders, adding a middle-market lending platform to the franchise at a fair price. National City expects the deal, which is planned to close by end of June, 2004, to be accretive to 2005 earnings per share, based on what S&P views as reasonable cost-saving assumptions. S&P is setting a 2005 earnings per share estimate of $3.24, and is raising the target price by $3, to $42, which is 13 times S&P's 2005 earnings per share estimate, in line with peers. The upgrade of S&P's opinion on Provident shares to buy, from accumulate, reflects S&P's recommendation on National City.

Krispy Kreme Doughnuts (KKD ): Maintains 4 STARS (accumulate)

Analyst: Dennis Milton

Systemwide sales jumped 26.6% in the January quarter, including a 1% contribution from the acquisition of Montana Mills. Same-store sales increased 9.1%, in line with recent trends. Krispy Kreme projects earnings per share of 26 cents for the quarter, in line with S&P's estimate. S&P is maintaining the fiscal 2005 (Jan.) earnings per share estimate of $1.20. Krispy Kreme shares are trading at 31 times this estimate, which S&P views as an attractive price for the company's strong growth prospects. S&P's 12-month target price of $43 reflects the intrinsic value of shares, according to a discounted cash-flow model.

Comcast (CMCSA ): Maintains 5 STARS (buy), and Walt Disney (DIS ): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

Disney's board rejected Comcast's merger offer, citing an offer price of 0.78 Comcast share per each Disney share as $3.60 below the value of Disney. Comcast retorted that it offered a "full and generous" premium valuation on Disney's prospects and three-year history. S&P thinks Disney is considerably less attractive as an acquisition target after the stock's significant run-up last week. S&P thinks Comcast will stay disciplined, but may up the ante in this hostile maneuver. The Disney board also offered a confidence vote on CEO Michael Eisner. Still, the Mar. 3 shareholders meeting seems critical, as ex-directors Roy Disney and Stanley Gold wage an anti-Eisner campaign.

North Fork (NFB ) and GreenPoint Financial (GPT ): Reiterates 3 STARS (hold)

Analyst: Erik Eisenstein

GreenPoint agreed to be acquired by North Fork in an all stock-deal expected to close in the fourth quarter, subject to necessary approvals. Under the agreement, each GreenPoint shareholder would receive 1.0514 shares of North Fork, worth $46 based on Friday's close. There appears to be no added acquisition premium, after a recent rise in GreenPoint shares on published reports it was exploring being acquired. At first blush, S&P sees the planned deal as mixed to negative for North Fork. While S&P would expect earnings accretion, S&P sees North Fork saddled with the interest-rate sensitivity of a mortgage bank.

Verizon Communications (VZ ): Maintains 3 STARS (hold)

Analyst: Todd Rosenbluth

S&P expects Verizon to be among the near-term beneficiaries of Cingular Wireless's planned acquisition of AT&T Wireless. Although Verizon Wireless is likely to lose its ranking as the largest U.S. wireless carrier, S&P believes that in 2004 it will take additional market share while Cingular is distracted with sizable integration issues. With Vodafone remaining a parent of Verizon Wireless, after being outbid for AT&T Wireless, Verizon Wireless's pockets should also remain deep. S&P still sees wireline challenges for Verizon, but S&P would hold the shares, given its likely stability.

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