S&P Lowers Chiron to Sell
Chiron (CHIR ): Downgrading to 1 STAR (sell) from 3 STARS (hold)
Analyst: Frank DiLorenzo (CFA)
Because of manufacturing problems, Chiron will not supply Fluvirin this flu season. We see impact into 2005 on increased potential competition. We think growth prospects for Chiron's flu business are diminished. We are also concerned about Betaseron, with possible approval on competing Antegren. We are lowering our 2004 earnings per share estimate to 75 cents from $1.75, 2005's to $1.90 from $2.22, and our estimated EPS growth rate to 12.5% from 17%. At best, we assume a 1.4 P/E-to-growth ratio applied to 2005 estimates. We are lowering our 12-month target price to $33 from $53.
Devon Energy (DVN ): Upgrading to 5 STARS (buy) from 4 STARS (accumulate)
Analyst: Charles LaPorta
Devon Energy shares have slightly underperformed peers over past few months due, we think, to flat production performance and continued high costs for finding and development. Devon recently announced an asset divestiture program, which we believe will improve development costs, and updated investors on high-impact exploration inventory. We are increasing our 2005 EPS estimate to $8.20 from $6.10 largely on substantial increase in 2005 natural gas price expectations and a 10% share repurchase announcement. We are raising our target price to $85 from $75, 10.4 times our 2005 estimate, a discount to peers.
NetFlix (NFLX ): Upgrading to 5 STARS (buy) from 4 STARS (accumulate) Analyst: William Mack (CFA)
NetFlix announces a more favorable outlook for profits through 2005, based mostly on gross margins it sees benefiting from improving disc usage rates, which results in a more gradual amortization assumption for older discs. We are raising our 2004 EPS estimate to 41 cents from 22 cents, and setting our 2005 estimate at 80 cents. However, we are trimming our discounted cash flow (DCF)-based 12-month target price to $29 from $33, based on a reduction in the risk premium embedded in the terminal multiple now applied to our 2006 free cash flow estimate.
Advanced Micro Devices (AMD ): Reiterate 3 STARS (hold)
Analyst: Amrit Tewary
AMD warns that third-quarter sales will be down slightly from the second quarter, citing softness in the company's flash memory business. We believe AMD is facing increased competitive pressure and weakening demand trends in its flash business. However, we think AMD is benefiting from improved demand in its microprocessor business, since its AMD64 processors are gaining traction with customers. We are lowering our earnings per share estimate for the third quarter to 10 cents from 15 cents, full 2004's to 44 cents from 60 cents, and 2005's to 54 cents from 80 cents. We are keeping our 12-month target price at $14, based on our price-to-sales analysis.
Pulte Homes (PHM ): Reiterate 3 STARS (hold)
Analyst: Michael Jaffe
Pulte Homes lowers its 2004 earnings per share guidance to $7.40 to $7.70, from $7.80 to $8.00, citing lower pricing and volume in Las Vegas than expected. We do not see this as a big negative for this company or other builders, since Pulte had set price hikes in the formerly very hot Las Vegas market way above those of its peers. Also, MDC Holdings (MDC ) reiterated its 2004 EPS guidance yesterday, and Hovnanian Enterprises (HOV ) reported relatively solid September orders. We are cutting our Pulte 2004 estimate by 20 cents to $7.60, 2005's by 10 cents to $8.00, and our 12-month target price by $5 to $56.
Eastman Kodak (EK ): Keep 2 STARS (avoid)
Analyst: Richard Stice (CFA)
Kodak announces the restructuring of three European facilities, which will result in close to 900 employee layoffs. The decision stems from Kodak's previously announced program to focus its efforts on the digital photography market, which includes total planned employee reductions of 12,000 to 15,000. We view the news positively, as we believe the company is taking another necessary step in its ambitious strategy shift. However, we remain concerned about increasing competitive pressures and the accelerating decline of traditional film products.
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