S&P Keeps Buy on Applied Materials

Plus: analysts' opinions on Intel, Google, and more

Please see the note regarding changes to Standard & Poor's STARS ranking system.

Applied Materials (AMAT ): Maintains 4 STARS (buy)

Analyst: Colin McArdle

Based upon much lower-than-expected October-quarter guidance, as rising inventories and declining end-demand for chips force manufacturers to cut spending, we are lowering our fiscal 2005 (Oct.) earnings-per-share expectation to 91 cents from $1.24. Due to the high fixed-cost nature of the business, any volume declines severely impact Applied Material's overall profitability. Management indicated that order cancellations have increased dramatically within the last month, as the fourth-quarter continues to be perceived as weak for IT spending by consumers and corporations. We are maintaining our 12-month target price of $21.

Intel (INTC ): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Intel's CEO Craig Barrett tells reporters that he expects the company's performance during the first half of 2005 to be much improved over the first half of 2004. Despite Barrett's comments, we remain comfortable with our sales growth forecast for 2005, which calls for about 7% growth on top of projected sales growth of about 11% this year. We are keeping our earnings-per-share estimates at $1.10 for 2004, and $1.25 for 2005. Given the recent increases in peer valuations, we are raising our target price to $27 from $23, based on our updated p-e and price-to-sales analyses.

Google (GOOG ): Reiterates 3 STARS (hold)

Analyst: Scott Kessler, Richard Stice, CFA

In an S-1 form filed with the SEC on Nov. 18, Google says that it expects its revenue growth rate and operating margin to decline over time, due largely to increasing competitive pressures. We view this announcement as unsurprising and consistent with normal business cycle characteristics. Moreover, we believe the widely anticipated launch of Microsoft's Internet search service will not have a near-term material impact on Google. Regardless, we think Google possesses notable sales and profit momentum. Our 12-month target price is $190.

MCI (MCIP ): Initiates with 3 STARS (hold)

Analyst: Todd Rosenbluth

Even after emerging from bankruptcy this year with a pared debt load, we think MCI faces sizable operating challenges that are likely to lead to operating losses in the second half of 2005. However, we believe that MCI has sufficient cash on hand to support its dividend for the next three years. We believe that the shares will be supported by its well above average dividend yield, now 8.5%, and market recognition that even without any obvious suitor, MCI is an attractive acquisition candidate. Our target price, based on enterprise value/EBITDA analysis, is $18.

Sears, Roebuck (S ): Maintains 3 STARS (hold)

Analyst: Jason Asaeda

We are raising our target price from $33 to $50, which is the cash option being offered to Sears shareholders through the planned merger with Kmart, pending approvals. Although Sears shares have traded above our target, we believe a competing bid for the company cannot be ruled out. We think Sears has an opportunity to strengthen its competitive positioning through real estate, product and cost synergies with Kmart, but we think it will likely take time for results to be measured, given what we see as significant integration and execution risks.

Cisco Systems (CSCO ): Reiterates 4 STARS (buy)

Analyst: Ari Bensinger

According to data released by independent research firm Dell 'Oro on Nov. 17, Cisco gained share in the mid-range routing segment but lost share in the low and high-end routing segments. With Cisco recently reporting October-quarter router sales down 12% sequentially, the share loss numbers are not a surprise to us. We believe that router sales were hampered by a product transition to the core CRS-1 and access ISR lines as customers await the full-scale launch of these new products. We view this weakness as temporary, and expect router sales to rebound during the January quarter.

Vivendi Universal (V ): Reiterates 4 STARS (buy)

Analyst: Yannick Mathieu, CFA

Vivendi's adjusted net income tripled in the third quarter is in line with our expectations. Results were boosted by a 6% rise in pro forma revenues, and by an improvement in pro forma operating margins, to 18.4% from 16.3%. Also, interest expense was down sharply, and tax credits helped significantly. Consolidated cash flow from operations was up 42%. In 2004, we see adjusted earnings per share before goodwill amortization and various special items of $1.52, and $1.98 for 2005. Based on sum-of-the-parts analysis, and with currency fluctuation, we are raising our 12-month target price to $34 from $32.

News Corp. (Cl. B) (NWS ): Reiterates 5 STARS (strong buy)

Analyst: Tuna Amobi, CPA, CFA

With News Corp.'s change of domicile completed, its shares were added to the S&P 500. While it's the non-voting shares that were designated an S&P index constituent, as of market close on Dec. 17, we think the move should also boost liquidity of the voting shares, and foster access to U.S. capital markets. Keys to our strong buy opinion include our views of company's global satellite TV footprint, surging cable networks, vertical integration, business and geographic diversification, transparent earnings quality, strong balance sheet and attractive valuation.

ConocoPhillips (COP ): Reiterates 3 STARS (hold)

Analyst: Tina Vital

We expect ConocoPhillips's upstream production will drop 3% in 2004, but the company told analysts that it expects new developments will boost growth by 5% in 2005 and 2006; increasing its exploration and production (E&P) spending from $4.5 billion in 2004, to $5.1 billion in 2005, and to $5.2 billion in 2006. Conoco Phillips's refineries process about 50% sour crude, and plans are underway to expand its heavy crude capacity at its Borger, Tex. and Wood River, Ill. refineries. We are raising our 2004 earnings-per-share estimate by 43 cents to $10.79, and 2005's by $1.24 to $9.54. A blend of our discounted-cash-flow and peer-multiple valuations leads us to raise our target price by $1 to $86.

Limited Brands (LTD ): Reiterates 3 STARS (hold)

Analyst: Marilyn Driscoll, CFA

Limited reports 10 cents, vs. 8 cents third-quarter operating earnings per share on 9% fewer shares, beating our 5 cents estimate. A consolidated 1% same-store sales gain was driven by 13% rise in same-store sales at Victoria's Secret and a 9% rise in same-store sales at Bath & Body Works, as comparable sales at apparel units declined 13%. We believe Limited is successfully elevating its non-apparel brands by quality improvements, fewer promotions, and new product launches. Our fiscal 2005 (Jan.) and fiscal 2006 earnings-per-share estimates remain $1.35 and $1.50, but our 12-month target price goes to $27 from $25, or to a peer-average 18 times our fiscal 2006 earnings-per-share estimate.

PETsMART (PETM ): Maintains 3 STARS (hold)

Analyst: Michael Souers

PETsMART reported October-quarter earnings per share of 24 cents, vs. 20 cents, in line with our estimate, on a 13% higher sales. Same-store sales growth of 6.7% is higher than the company's previous 5% to 6% guidance. In our view, PETsMART shares are trading up today in large part because of the company's favorable remarks about two of its high-margin services businesses, both still in the early stages of development. We still see earnings per share of $1.18 for fiscal 2005 (Jan.), but are raising our fiscal 2006 estimate to $1.45 from $1.43. We are also increasing our 12-month target price, to $36 from $34, based on our revised discounted-cash-flow model.

Note: Effective Novermber 12, 2004, Standard & Poor's has modified its Stock Appreciation Ranking System (STARS) nomenclature:

• 5 STARS now designates a stock ranked strong buy, instead of the previous buy;

• 4 STARS is now buy, instead of accumulate;

• 2 STARS is now sell, instead of avoid; and

• 1 STARS is now strong sell, instead of sell.

The 3 STARS ranking remains as hold.

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