S&P Downgrades Pixar

Plus analysts' opinions on Intel, IBM, Procter & Gamble, and more

Pixar (PIXR ): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: William Mack, CFA

Our downgrade is based on valuation. We think the stock's 20% advance since posting third-quarter results in mid-November, limits further gains. We note that Pixar may prove volatile leading up to the late 2005 expiration of its long-standing distribution agreement with Walt Disney. Still, we are raising our 12-month target price to $102 from $92, based on a discounted-cash-flow methodology that now reflects a lowered cost of capital assumption. Our 2004 and 2005 earnings per share estimates of $2.57 and $1.95 are unchanged.

Intel (INTC ): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Intel raised its fourth-quarter sales guidance to $9.3 billion to $9.5 billion, from $8.6 billion to $9.2 billion. It also forecasted a gross margin of 55% to 57%, compared with its earlier projection of 56% plus or minus a couple of points. The improved outlook suggests to us that holiday end-demand is tracking above expectations. Mainly on higher sales assumptions, we are upping our fourth-quarter earnings per share estimate to 30 cents from 28 cents, our full 2004 estimate to $1.12 from $1.10, and 2005's to $1.33 from $1.25. We are raising our 12-month target price to $28 from $27, based on our p-e and price-to-sales analyses.

International Business Machines (IBM ): Reiterates 5 STARS (strong buy)

Analyst: Megan Graham-Hackett

Today's New York Times reports that IBM may sell its PC business for $1 billion to $2 billion. Over the course of the past several years, investors have broached the subject of selling the low-margin PC business, and IBM has consistently maintained that it is a strong cash flow business and retained for strategic reasons. We would view the sale as a positive, depending on which vendor IBM partners with to supply PCs to its customers in a total solutions sale. With IBM trading below peer average on a price-to-sales basis and given its strong competitive positioning, in our opinion, we view shares as attractive.

Procter & Gamble (PG ): Reiterates 5 STARS (strong buy)

Analyst: Howard Choe

A U.S. advisory panel has recommended that the FDA not approve Procter & Gamble's Intrinsa testosterone patch, citing the need for longer-term testing for side effects. The FDA typically follows the panel's vote. If Intrinsa is not approved, P&G will need to provide additional supporting data for many months to year(s), in our view. While not a complete surprise given the increased scrutiny of the FDA and pharmaceuticals, we view it as a minor setback for P&G. The near-term financial impact is not material, in our view, given P&G's diversification and over $50 billion in sales.

Boston Scientific (BSX ): Reiterates 4 STARS (buy)

Analyst: Robert Gold

A U.S. District Court in New York rules on preliminary motions in a breach of contract dispute between Boston Scientific and Medinol Ltd. In our view, this ruling to not dismiss all of the elements in the case will result in a court battle in 2005. We think the most likely outcome would be payment of royalties to Medinol on Taxus sales, but we do not believe Boston Scientific will be restricted from marketing Taxus or developing next-generation stents. We are lowering our 12-month target price by $3 to $41, to reflect litigation risks. At 16 times our $2.20 2005 earnings per share estimate, Boston Scientific is priced well below peers.

AmeriTrade (AMTD ): Reiterates 4 STARS (buy)

Analyst: Robert Hansen, CFA

At a conference, Ameritrade said that it plans to file a banking application in early fiscal 2005 (Nov.), but that it may not be approved until late fiscal 2005. We expect the company to initially sweep about $2 billion in client cash balances, growing to nearly half of total client cash balances over time. We project that a bank unit will add about 4 cents to earnings per share in fiscal 2006. We are leaving our fiscal 2005 earnings per share estimate at 75 cents. Our 12-month target price stays at $16, 21 times our fiscal 2005 estimate. We think AmeriTrade's banking initiative validates the diversified business model of E*Trade.

MGM Mirage (MGG ): Reiterates 3 STARS (hold)

Analyst: Thomas Graves, CFA

MGM Mirage stock is up today after acquisition target Mandalay Resort Group reported stronger-than-expected October-quarter earnings per share. We expect MGM Mirage to acquire Mandalay by mid-2005, subject to necessary approvals. MGM Mirage and Mandalay each have a sizeable presence in Las Vegas. We are raising our 2004 earnings per share estimate for MGM Mirage to $2.43 from $2.40, and 2005's to $2.75 from $2.65. Helped by a favorable outlook for the Vegas market, we look for MGM Mirage shares to trade at a premium p-e to other gaming stocks and the S&P 500. We are raising our 12-month target price for MGM Mirage to $65 from $61.

Weight Watchers (WTW ): Reiterates 5 STARS (strong buy)

Analyst: Howard Choe

We are raising our 12-month target price to $52 from $48. We are assuming a more aggressive free cash flow growth rate of 8%, compared to our prior 7% view, given our outlook for improved profitability in 2005, and an average growth rate of 48% over the past four years. Our weighted-average cost of capital and terminal growth rates remain 8.3% and 3%. Our new target price translates to a p-e of 24 times our 2006 earnings per share estimate of $2.18, in line with Weight Watchers's 3-year average. We view the company as attractively valued, recently trading at a 22 times forward p-e, which is at a 10% discount to its 3-year average.

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