S&P Says Buy Walgreen

Also: analysts' opinions on Hewlett-Packard, Intel, and Nautilus. Plus more

Walgreen (WAG ): Maintains 5 STARS (buy)

Analyst: Joseph Agnese

Walgreen posted August-quarter earnings per share of 32 cents vs. 27 cents, in line with our forecast. Sales rose 14%, as we expected, on a comparable-store sales increase of 9.7%. Margins are benefitting from increased generic drug utilization, and improved front-end sales. The company continues to gain market share in most categories from food, drug, and mass market retailers. Walgreen is budgeting $1.5 billion in capital expenditures for fiscal 2005 (Aug.), with plans for construction of a new distribution center, and the addition of 365 net new stores. Our fiscal 2005 earnings per share estimate is $1.52, Our 12-month target price is $43, based on discounted cash-flow and p-e analyses.

Advanced Micro Devices (AMD ), Hewlett-Packard (HPQ ), and Intel (INTC ): Maintains 3 STARS (hold)

Analyst: Megan Graham-Hackett, Amrit Tewary

We are not surprised by news that HP will stop offering desktop workstations based on Intel's Itanium processor, since we did not think there were enough Itanium-based applications to drive workstation demand. We think HP's more cost-conscious customers prefer the 64 bit-extensions afforded by Advanced Micro's chips, which allow the customers to run new software, as well as legacy applications, on the same workstation. Importantly, HP will continue its relationship with Intel on the server line. We see HP shares as fairly valued, based on our price-to-sales and discounted cash-flow analyses.

As HP remains committed to using Itanium for high-end servers, which is a major focus for Intel, we are keeping our hold opinion on Intel and our 12-month target price of $23, based on our p-e model.

Given our view of elevated macro and inventory risks, we are cutting our 12-month target price on Advanced Micro to $14 from $16, based on a below-historical norm price-to-sales ratio of 1.0 times our 2005 sales per share estimate.

Nautilus (NLS ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Massimo Santicchia

We believe that shares have been propelled by investors' beliefs that the company's turnaround is gaining momentum, and expectations that it will improve profitability. New products, now accounting for 30% of revenue, and its relationship with Sears are positives, in our view, that could drive growth into 2004 and 2005. However, after the recent stock run-up, we believe that our favorable view is largely reflected in the share price. Our discounted cash-flow analysis indicates an intrinsic value and 12-month target price of $23.

Fannie Mae (FNM ): Maintains 2 STARS (avoid)

Analyst: Erik Eisenstein

Fannie Mae agreed to correct accounting issues raised by its regulator. While doing so, it agrees to achieve and maintain a capital surplus target of 30% within 270 days. We expect Fannie Mae to be required to raise $3.8 billion in capital. While we don't yet know how Fannie Mae plans to achieve this, we're assuming, for now, no mortgage portfolio growth for the rest of 2004 and 2005, and are lowering our earnings per share ests. to $6.85 and $8.20, respectively, from $7.37 and $8.6. Yet, we also see a small step toward resolution and are keeping our 12-month target price at $61, on a higher multiple off the 2005 estimate.

General Motors (GM ): Maintains 3 STARS (hold)

Analyst: Efraim Levy, CFA

We are reducing our 2004 and 2005 earnings per share forecasts to $6.74 and $6.93, respectively, from $6.90 and $7.00. We are lowering our estimate for sales and increasing our estimate for marketing costs, including advertising and incentives. We are concerned about what we view as high truck inventories; however, stronger-than-expected financial services performance could provide upside to our forecast. Based on a combination of peer comparative and historical p-e and discounted cash-flow analyses, we are lowering our 12-month target price to $46 from $52.

Time Warner (TWX ): Maintains 4 STARS (accumulate)

Analyst: Tuna Amobi, CFA, CPA

Time Warner and Comcast agreed to plan providing Comcast with an option, from Dec. 12, 2004, to Apr. 1, 2005, to reduce its 21% interest in Time Warner Cable to 17%. Upon exercise of the option, Time Warner will redeem 4% of Time Warner Cable in exchange for cable systems serving 90,000 subscribers, plus $750 million cash. We calculate the agreement values Time Warner at nearly $5.6 billion, which we deem ample, based on intrinsic value estimates. Also, Comcast would not ask Time Warner to register its shares for a possible IPO prior to April 1, which we view as an important concession to Time Warner, given its pending SEC investigation.