S&P Says Buy IBM

Also: analysts' opinions on McData, Genzyme, and Oracle

IBM Corp. (IBM ): Maintains 5 STARS (buy)

Analyst: Megan Graham Hackett

Market researcher IDC released fourth-quarter 2003 global server sales, which revealed that IBM gained the most share of the top four server vendors. IBM grew server revenues by 17.7% to garner a 37.9% share, up 200 basis points. Hewlett Packard followed with a 25.8% market share, losing 50 basis points. The server market's fourth-quarter 11.4% rise was led by low-end systems, but Unix servers grew for the first time in 11 quarters. Given IBM's momentum, S&P continues to like the shares, which are trading below S&P's 12-month target price of $131, based on S&P's discounted cash-flow and price-to-sales analyses.

McData (MCDTA ): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Richard Stice, CFA

Data storage-equipment maker McData posted January-quarter earnings per share of 3 cents, vs. 9 cents, both before charges (the GAAP loss was 7 cents, vs. earnings per share of 7 cents), which is 2 cents above S&P's view. Revenue rose 20% quarter over quarter, aided by a pickup in software sales. Gross margin of 57.3% beat S&P's estimate by 130 basis points on a better product and channel mix. McData says that sales cycles have stabilized and deal sizes are trending upward. S&P is raising the fiscal 2005 (Jan.) earnings per share estimate by 5 cents, to 13 cents, and is raising the 12-month target price by $1, to $8. Despite ongoing competitive threats, given S&P's view of favorable demand trends and improving execution, S&P would hold the shares.

Genzyme (GENZ ): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Frank DiLorenzo, CFA

Genzyme plans to buy Ilex Oncology for about $1 billion in cash. S&P questions the purchase, as well as last year's buy of SangStat. In S&P's view, products and pipelines from these two firms do not represent any major commercial opportunities. S&P is cutting the pro forma 2004 earnings per share estimate to $1.59, from $1.75, and trimming the 2005 estimate to $2.01, from $2.20, due to dilution from the planned transaction. Genzyme sees the deal as accretive in 2006. Based on S&P's 2005 estimate, the price-earnings-to-growth ratio of 1.3 remains favorable, compared to the peer average of 1.5. On a discounted cash-flow analysis, S&P is lowering the target price to $61, from $70.

PeopleSoft (PSFT ) and Oracle (ORCL ): Reiterates 3 STARS (hold)

Analysts: Jonathan Rudy, CFA, and Richard Stice

The Department of Justice says it's filing an antitrust lawsuit to block Oracle's $9.4 billion hostile bid for PeopleSoft. New York and six other states are joining the lawsuit. Oracle says the Justice Department's decision has no basis in fact or law, and that it will challenge the suit in court. Earlier this month, Oracle raised its bid for PeopleSoft by 33%, to $26 per share. S&P views both Oracle and PeopleSoft as fairly valued, with 12-month target prices of $14 and $25, respectively, particularly when considering the ongoing uncertainty regarding a potential acquisition.

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