S&P Says Accumulate KLA-Tencor

KLA-Tencor (KLAC ): Maintains 4 STARS (accumulate)

Analyst: Colin McArdle

Chip-equipment maker KLA reported March-quarter earnings per share of 33 cents, vs. 14 cents, above S&P's 29 cents estimate. Revenues of $390 million represented an increase of 28% from last year and 15% from the December quarter, aided by higher capital spending trends as chip manufacturers build capacity. S&P is raising the fiscal 2004 (June) earnings per share estimate to $1.25, from $1.16 in order to reflect increasing momentum for semiconductor equipment. Applying a peer-group p-e of 35 to S&P's calendar 2004 earnings per share estimate of $1.71 results in a 12-month price target of $60.

Starbucks (SBUX ): Maintains 2 STARS (avoid)

Analyst: Dennis Milton

Starbucks posted March-quarter earnings per share of 19 cents, vs. 13 cents, a penny above S&P's estimate. Operating margin widened on leveraging of fixed costs against strong same-store sales growth of 12%. S&P is raising the fiscal 2004 (Sep.) estimate by 2 cents, to 91 cents, and upping the fiscal 2005 estimate by 2 cents, to $1.04. S&P also is raising the 12-month target price by $2, to $33, which reflects strong sales trends. At 48 times S&P's fiscal 2004 Core Earnings per share estimate of 77 cents, which includes a 14 cents expense for stock option grants, the coffee chain's stock is trading at a significant premium to its intrinsic value, based on a discounted cash-flow model.

Rare Hospitality (RARE ): Reiterates 4 STARS (accumulate)

Analyst: Dennis Milton

The restaurant operator posted March-quarter earnings per share of 42 cents, vs. 34 cents a year ago, 3 cents above S&P's estimate. Revenue rose 23%, reflecting more stores in operation and strong same-store sales gains at each of the company's three concepts. The company owns Bugaboo Creek Steak House, The Capital Grille, and Hemenway's Seafood Grille, among other names. Results benefited from leveraging fixed costs against a rising sales base. S&P is raising the 2004 earnings per share estimate by 8 cents, to $1.46, and upping the 2005 estimate by 8 cents, to $1.63 to account for strong sales momentum. The 12-month target price was raised by $1, to $33, based on a price-earnings of 20 times S&P's 2005 earnings per share, a slight premium to peers on S&P's view of Rare's strong expansion prospects.

EBay (EBAY ): Reiterates 5 STARS (buy)

Analyst: Scott Kessler

Online auction giant eBay posted first-quarter pro forma earnings per share of 31 cents, (GAAP earnings was 30 cents) vs. 18 cents (GAAP earnings was 16 cents). Results were 4 cents above S&P's forecast and 5 cents above the Street's estimate. Revenues rose 59%, reflecting strength in U.S. transaction, international, and payments revenues. Proforma operating margin was 37.9% -- 170 basis points above S&P's forecast -- owing to scale. Based largely on better-than-expected first-quarter results and forward guidance, S&P is raising eBay's 2004 earnings per share estimates to $1.21, from $1.14, and upping the 2005 estimate to $1.57, from $1.52. S&P is also lifting the 12-month target price to $95, from $92, as a result of revised discounted cash-flow analysis.

Qualcomm (QCOM ): Maintains 5 STARS (buy)

Analyst: Kenneth Leon, CPA

Qualcomm posted March-quarter earnings per share of 53 cents, vs. 30 cents, before special items, 10 cents above S&P's estimate, reflecting sales growth and widening margins, with a favorable shift in revenue mix to license fees. Sales rose 20% from a year ago on CDMA license and chip volume growth. The cell-phone chipmaker says global CDMA chip demand exceeded its own supply, and raised the chip guidance volume to 33 million to 35 million in the third quarter. S&P is raising the fiscal 2004 (Sep.) earnings per share estimate by 25 cents, to $2.00, and upping fiscal 2005's estimate by 35 cents to $2.45. Priced near peers on 2004 estimates, but growing faster, S&P would buy.

Viacom (VIA.B ): Maintains 5 STARS (buy)

Analyst: Tuna Amobi, CFA, CPA

The media giant posted first-quarter earnings per share of 33 cents (excluding an 8 cents tax benefit), vs. 26 cents, ahead of S&P and the Street's estimates by 3 cents and 2 cents, respectively. Revenues rose 12% and EBITDA jumped 16%, fueled by strong ad sales, with some margin expansion at the cable networks, TV broadcast nets, and the owned-and-operated stations. S&P also note signs of an early turn at Infinity Radio. Viacom affirmed its 2004 outlook for 5% to 7% growth in revenues, 12% to 14% growth in operating income, and 13% to 15% growth in earnings per share. But S&P believes these targets could prove conservative as political spending ramps up in the second half.

Metro-Goldwyn-Mayer (MGM ): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CFA, CPA

MGM shares rallied after reports that Sony is in talks to buy the film studio and distributor for $5 billion in cash, or about $20.33 per share, including about $2 billion in debt to fund the recently announced special dividend of $8 per share. Separately, MGM says its board will vote on the special dividend soon after closing a credit refinancing next week. Prior merger discussions with parties, including Sony, faltered, but S&P thinks a changing landscape could help motivate a sale this time. MGM's vast library, anchored by the popular James Bond titles, could interest other buyers, but S&P thinks a bidding war is unlikely.

AT&T (T ): Reiterates 5 STARS (buy)

Analyst: Todd Rosenbluth

The long-distance phone company posted first-quarter earnings per share of 38 cents, vs. 67 cents, including one-time charges and benefits, below S&P's estimate and ahead of the Street's estimates. Revenues and EBITDA margins were also a bit below S&P's estimate, but S&P is encouraged by the relative stability of the business services segment, despite pricing pressure, and by debt reduction. S&P is trimming AT&T's 2004 operating earnings per share estimate by 10 cents, to $1.48 to account for one-time effects. However, there are some catalysts, including VoIP service launches, a strong cash balance, plus a 5% dividend yield, so S&P would buy the shares at a discount to peer multiples and intrinsic value. The target price is $25.

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