GM Shares Cut to Sell

S&P cites heightened competition in the U.S. and increased pension and healthcare expense. Plus analysts' opinions on Apple, Cisco, and more

General Motors (GM ): Downgrades to 2 STARS (sell) from 3 STARS (hold)

Analyst: Efraim Levy, CFA

We are lowering our operating margin and net earnings estimates for 2005. We expect GM to try to put on its best face when it presents to analysts today. Still, due to our expectations for higher raw materials costs, weakening profitability in Asia, losses in Europe, increased pension and healthcare expense, and greater margin pressure from increasing competition in the U.S., we are reducing our 2005 earnings per share estimate to $4.77 from $6.20. Based on discounted cash flow and peer comparative and historical p-e analyses, we are cutting our 12-month target price to $34 from $41.

Apple Computer (AAPL ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Apple posted December-quarter earnings per share of 70 cents, vs. 16 cents, ahead of our 40 cents estimate, as revenues jumped 74% to $3.5 billion, $600 million above our model, led by iPod growth (500,000 units above our forecast). iMacs also beat our estimate, but PowerMacs were below our model. The company sees March-quarter revenues of $2.9 billion, earnings per share of 40 cents, both just above our model. Upping our fiscal 2005 (ending September) estimate to $2.00 from $1.60, and our target price to $80 from $66, or 36 times our calendar year 2005 estimate. The success of the iPod is impressive, but we see risks with shares trading above peers on a price-to-share and p-e basis, as iPod growth rates have peaked, and new products carry lower margins.

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

Analyst: Ari Bensinger

Cisco agrees to acquire Airespace, a provider of wireless local area networking systems, for $450 million in stock. While the price, which we estimate is 8 times 2004 sales, seems to us rich, we note that Airespace's revenue is ramping quickly, having captured the number 3 position in the enterprise Wireless Local Area Network (WLAN) equipment market after only recently entering the arena. If the deal is consummated, we believe Airespace would fill Cisco's need for an internal WLAN switching solution. The deal would likely end Airespace's product alliances with Cisco rivals Alcatel and Nortel.

Reuters (RTRSY ): Maintains 3 STARS (hold)

Analyst: Tom Graves, CFA

We see guidance today from Reuters of an expected 1.5% dip in underlying first-quarter revenue (excluding Instinet) supporting our projection of slight core recurring revenue growth in the second half of 2005. It also suggests to us that the financial information industry remains very competitive, and we remain cautious on Reuters growth prospects. However, we expect its stock to be supported by what we view as an attractive sustainable dividend, currently yielding 2.4%, and the likelihood of either special dividend or sizable stock buyback program. We are raising our target price by $2 to $45.

Lam Research LRCX: Upgrades to 5 STARS (strong buy) from 4 STARS (buy)

Analyst: Colin McArdle

We believe Lam Research has the most streamlined business model among semiconductor equipment peers and note a recent 10% stock price drop. It also recently reaffirmed fourth-quarter guidance. Various metrics, including $716,000 revenue per employee, give us reason to believe Lam Research is poised to grow earnings in an upcycle and most likely to maintain them in a downturn. It is also the market leader with over 30% share in etch, one of largest markets served, with an even wider margin in leading-edge technology such as 300mm. Using peer-group p-e 14 times our $2.27 fiscal 2005 estimate, our 12-month target price remains $32.

Borders Group (BGP ): Maintains 3 STARS (hold)

Analyst: Jason Asaeda

Borders posted a 4.8% gain in holiday sales to $1.2 billion, beating our 4.0% growth projection. Results benefited from above-plan sales at Borders superstores and a 29.4% increase in international sales. Sales fell 3.4% at Waldenbooks on store closings. We see strength in book sales sustained over the near term by gift card redemptions and new title releases. And with the company guiding for January-quarter earnings per share of $1.60 to $1.62, in line with our $1.60 estimate, we are reiterating our $1.74 fiscal 2005 (ending January) and $1.95 fiscal 2006 earnings per share estimates. Our 12-month target price remains $26.

Steris (STE ): Reiterates 1 STAR (strong sell)

Analyst: Robert Gold

In order to reflect Steris's recent acquisition of certain assets of privately-held Cosmed Group, we are raising our fiscal 2006 (ending March) earnings per share estimate by 5 cents to $1.50, assuming revenue contribution of about $20 million. Despite this potentially accretive transaction, we remain concerned about softening sales in the life sciences business and margin compression, which we expect in the coming quarters. In our opinion, the company faces sizable challenges in restoring meaningful sales growth in life sciences amid weak demand in both Europe and North America. Our 12-month target price remains $18.

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