S&P Upgrades Verizon to Buy

Also: analysts' opinions on Hewlett-Packard and Wal-Mart. Plus more

Verizon (VZ ): Upgrades to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Todd Rosenbluth

With the top U.S. carriers having reported second-quarter results, we believe Verizon's wireless segment is the clear industry leader, and we expect market share gains to continue into 2005. Although we still see wireline competitive pressures, we believe Verizon's overall growth prospects are above the other regional bell operating carriers. Using our 2005 sales estimates, our sum-of-the-parts analysis values Verizon at about $45 a share. Blending this with our discounted cash-flow analysis, we arrive at our 12-month target price of $44, up from $39. Combined with a dividend yield of about 4%, we would buy the shares for their total return potential.

Hewlett-Packard (HPQ ): Maintains 3 STARS (hold)

Analyst: Megan Graham-Hackett

HP preannounced a July-quarter shortfall, saying revenue rose just 9% to $18.9 billion, vs. our $19 billion estimate. Also, earnings per share are expected to be 24 cents, vs. 23 earnings per share, below our 33 cents forecast. The technology company noted the shortfall is due to mix of business and to execution issues in the server division. Seasonality and the server group issues are expected to also affect the October quarter. Here, HP sees revenue of $21 billion, in line with our model, but sees 35 cents to 41 cents earnings per share. We lowered our fiscal 2004 (Oct.) earnings per share estimate to $1.28 from $1.43. Despite the disappointing news, we view the shares as worth holding, trading well below peers on a price-sales basis.

Wal-Mart (WMT ): Maintains 4 STARS (accumulate)

Analyst: Joseph Agnese

The world's largest retailer posted January-quarter earnings per share of 62 cents, vs. 52 cents -- a penny above our estimate and at the top of Wal-Mart's guidance of 60 cents to 62 cents. We believe results are benefiting from improved inventory and merchandise management despite higher labor and utility costs. Wal-Mart upped its fiscal 2005 (Jan.) earnings per share guidance range by 1 cent, to $2.36 to $2.40, as it projects growth in employment and real income will lessen the adverse impact of higher gas prices on U.S. consumers. With gross margins better than expected, we're raising our fiscal 2005 earnings per share estimate by 3 cents to $2.40. Our 12-month target price remains $62, based on discounted cash-flow and p-e analyses.

Interstate Bakeries (IBC ): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Richard Joy

Shares are down today as the company announced an amendment to a senior secured credit facility and its plan to issue $100 million in convertible notes. It says the new credit amendment will increase interest rates on debt by 0.5%, which we believe will be mitigated by cost-saving steps. While earnings visibility remains poor as Interstate continues to feel the impact of low-carb diets and excess capacity, we view the share pullback as overdone. We think the low-carb diet fad has peaked, and see trends improving for Interstate during the second-half of fiscal 2005 (May). Our 12-month target price remains $9.

Tiffany & Co. (TIF ): Maintains 4 STARS (accumulate)

Analyst: Jason Asaeda

Tiffany posted July-quarter earnings per share of 25 cents, vs. 28 cents, 4 cents below our estimate. U.S. sales remain strong, but the problems appear worse than we had expected in Japan, where sales fell 3% including a 6% currency translation benefit. Tiffany believes new product launches and improved marketing will lift results in Japan. However, we're cutting our fiscal 2005 (Jan.) earnings per share estimate by 7 cents to $1.53, and fiscal 2006's by 13 cents to $1.70, reflecting more conservative revenue growth assumptions. We're lowering our 12-month target price to $30 from $40, based on our forward p-e and discounted cash-flow analyses.

Extreme Networks (EXTR ): Upgrades to 3 STARS (hold) from 1 STAR (sell)

Analyst: Mark Basham

With Extreme's stock down 38% year-to-date, the shares have been among the weakest performers in the communications-equipment group, where several emerging trends, such as growth in internet telephony and wireline/wireless network convergence are stimulating demand, in our view. We're positive on the group and see demand growing by 10% to 15% annually for the next three to five years. We believe the current price fairly values the shares, in light of the company's competitive positioning, including its strategic alliance with Avaya.

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