S&P Says Buy Automatic Data Processing
Automatic Data Processing (ADP ): Reiterates 5 STARS (buy) and Ceridian (CEN ): Reiterates 4 STARS (accumulate)
Analyst: Stephen Crane
The April non-farm payroll increase of 288,000 jobs was notably higher than consensus estimates of 173,000, the second straight month of solid gains following March's revised 337,000, which was the fastest growth witnessed in nearly four years. The April jobs growth came from service-providing industries, and to a lesser degree construction and manufacturing. We continue to be positive on payroll providers, since we expect that they will be prime beneficiaries of an improving job market.
Krispy Kreme Doughnuts (KKD ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)
Analyst: Dennis Milton
Krispy Kreme reduced its fiscal 2005 (Jan.) earnings per share guidance to a range of $1.04 to $1.06, from $1.16 to $1.18, citing difficult sales trends in off-premises accounts. The company also announces it will take one-time charges of approximately 11 cents to close its Montana Mills operation and several company-operated Krispy Kreme stores. We are downgrading our recommendation to hold and cutting the 12-month target price to $33, from $43, based on reduced earnings guidance and increased risk we see. We are placing our fiscal 2005 earnings per share estimate of $1.20 under review.
Lennar (LEN ) and D.R. Horton (DHI ): Downgrades to 3 STARS (hold) from 5 STARS (buy); Pulte Homes (PHM ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate); Hovnanian (HOV ): Downgrades to 2 STARS (avoid) from 4 STARS (accumulate); Toll Brothers (TOL ): Downgrades to 2 STARS (avoid) from 3 STARS (hold); KB Home (KBH ) and Centex (CTX ): Downgrades to 1 STAR (sell) from 4 STARS (accumulate)
Analyst: Michael Jaffe
We are cutting our 12-month target prices for Lennar to $49, from $73; D.H. Horton to $28, from $47; Pulte Homes to $50, from $68; Hovnanian to $26, from $58; Toll Brothers to $32, from $48; KB Home to $51, from $88; and Centex to $35, from $63. Our 3-STARS stocks are in markets we view as demographically favorable. Lennar and Pulte are in retirement areas, where many customers pay cash.
National Commerce Financial (NCF ): Maintains 5 STARS (buy)
Analyst: James O'Brien
A Wall Street Journal article reports that National Commerce is in talks on being acquired by either SunTrust Banks or Fifth Third Bancorp. This news does not surprise us, given our view of National Commerce's attractive high-growth footprint and low-cost operating model, coupled with continuing M&A activity in the banking industry. Based upon recent deal metrics in the region, we are raising our 12-month target price to $38, from $34 to reflect potential acquisition premium. We view National Commerce as attractive both on fundamentals and on the potential acquisition premium.
Janus Capital (JNS ): Reiterates 2 STARS (avoid)
Analyst: Robert Hansen, CFA
Janus reported total assets under management of about $140 billion for the month ended April 31, down 3.2% from the prior month and below our estimate. Net outflows were $1.6 billion, vs. $3.1 billion in March. We expect net outflows to continue in 2004, given our view of the firm's weak fund performance and diminished credibility. We are leaving our 2004 operating earnings per share estimate unchanged at 80 cents, hurt by fee reductions. Our 12-month target price remains $15, which is 19 times our 2004 earnings per share estimate, a discount to peers. We think turnarounds are extremely difficult in the fund-management industry and would avoid Janus shares.
King Pharmaceuticals (KG ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)
Analyst: Phillip Seligman
First-quarter operating earnings per share of 11 cents, vs. 34 cents is 22 cents below our estimate. We believe King's sales decline reflects not only implementation of inventory management pacts with wholesalers, but also slow demand for some key drugs, based on industry data from research firm IMS. We see this inventory transition heaviest in the first half, but lasting to the fourth quarte, and see earnings per share then gaining against weak comps. We are cutting our 2004 earnings per share estimate by 60 cents to 95 cents. With little visibility on sales and earnings per share, we think King warrants a discount to peers on a price-sales basis of about 2 to 2.5. As a result, we cut our 12-month target price by $6, to $15.
Fannie Mae (FNM ): Maintains 3 STARS (hold)
Analyst: Erik Eisenstein
In response to a directive from the Office of Federal Housing Enterprise Oversight, Fannie Mae agreed to submit information measuring the impairment of specific securities based on the OFHEO's methodology. But Fannie Mae also maintains it hasn't violated GAAP rules and confirms a report that it's seeking guidance from the Securities and Exchange Commission with respect to its SEC filings. We're reducing our 12-month price target by $5, to $77, to reflect OFHEO's definitive determination against Fannie Mae, though we view the SEC's as more important. Our target reflects our view of a fair, but very low historical p-e off our $9.10 2005 earnings per share estimate.
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