S&P Boosts Google Target Price

The Internet search engine remains at 4 STARS (buy) after its fourth-quarter profit surge. Plus analysts' opinions on Martha Stewart Living, Countrywide, and more

Google (GOOG ): Maintains 4 STARS (buy) and raises estimates and target price:

Analyst: Scott Kessler

Google shares moved higher Feb. 2 after the Internet search provider posted fourth-quarter earnings per share of 92 cents, vs. 43 cents one year earlier, excluding stock compensation expense. Our forecast was 83 cents. Earnings per share on a GAAP (generally accepted accounting principles) basis was 71 cents, vs. 10 cents. Revenues rose 101%, reflecting gains in both Google-branded and affiliate sales in the U.S. and internationally.

We are raising our 2005 estimates for revenues to $5.7 billion from $5.3 billion, and for earnings per share to $4.17 from $3.70, reflecting our favorable outlook for Google's traffic, pricing, and operating margins. Based on revised discounted cash flow analysis, we are increasing our 12-month target price to $260 from $230.

Martha Stewart Living (MSO ): Upgrades to 2 STARS (sell) from 1 STAR (strong sell)

Analyst: Gary McDaniel

Despite today's price decline, we think that investors in Martha Stewart shares seem to be valuing the company based on past earnings multiples and expectations of rapid recovery and future growth, rather than its recent performance and our near-term outlook. However, looking out to our 2006 estimate for EBITDA of $76.8 million, and applying the 19.4 times median multiple of 12-month trailing EBITDA from Martha Stewart's IPO through June 2003, we arrive at a new enterprise value. As a result, we are raising our 12-month target price to $30 from $20. We still find the shares overvalued.

Countrywide Financial (CFC ): Downgrades to 2 STARS (sell) from 3 STARS (hold)

Analyst: Mark Hebeka, CFA

Countrywide's fourth-quarter earnings per share of 56 cents, vs. 94 cents is well below our estimate. Countrywide's mortgage banking earnings plunged on hedging losses and impairment charges, reflecting a greater-than-expected flattening of the yield curve and a decline in interest rate volatility. We expect strong performance in the company's banking and capital markets segments to help offset future areas of weakness, and look for Countrywide to better prepare for market conditions amid potentially bumpy road we see ahead. We are reducing our 2005 earnings per share estimate to $3.74 from $3.93. We are lowering our target price to $33 from $35.

Fox Entertainment (FOX ): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

December-quarter earnings per share of 44 cents, vs. 36 cents beat our estimate by 4 cents on DVD sales of summer 2004 titles, solid ad and affiliate revenues at FX and Fox News, but lower sports payments at regional nets amid NHL lockout. Ratings appear to have turned for the Fox network, with solid American Idol, 24, and Simple Life shows. Fox still sees high-single-digit EBITDA growth in fiscal 2005 (ending September), which we view as conservative. We are raising our fiscal 2005 earnings per share estimate by 2006 to $1.49. Our target price remains $35 on likely completion, pending approvals, we see in February of buyout by 82%-owner News.

Boeing (BA ): Reiterates 3 STARS (hold)

Analyst: Robert Friedman-CPA

This $52 billion-revenue aircraft-making giant posted fourth-quarter S&P Core earnings per share of 2 cents (we calculate), a 95% drop from 37 cents in the year-earlier period, and below our 38 cents estimate. The drop was mostly due to a 44 in charges related to the cessation of the 717 jetliner program. However, after adjusting for pension contributions, full-year 2004 per-share free cash flow soared to $7.75 vs. $3.64. Looking at Boeing's long-term prospects, we are forecasting 10-year 6% free cash flow growth rates and 12% return on equity. Boeing shares are trading near our discounted-cash-flow-based 12-month target price of $55.

Computer Associates (CA ): Maintains 3 STARS (hold)

Analyst: Zaineb Bokhari

Computer Associates announces the appointment of new CFO Robert Davis. Formerly vice president of corporate finance and chief accounting officer at Dell Inc., he will assume his new position on Mar. 1. We see this as a positive development from an operational standpoint, since it removes the CFO responsibilities from Computer Associates's current COO, Jeff Clarke. In a separate announcement, Computer Associates increased the number of independent board members to 8 from 7 (of 11 total). We are encouraged by this beneficial development in corporate governance.

Honda Motor (HMC ): Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analyst: Christopher Lee, CFA, James Peters, CFA

We remain somewhat cautious about the outlook for Honda, due to its huge North American exposure. However, following review of Honda's December-quarter results, we are raising our fiscal 2005 (ending March) earnings per ADS estimate to $2.48 from $2.00. Our estimate incorporates an expected EBIT margin expansion and stronger sales outlook in Asia and Europe, more than offsetting currency volatility, potential raw material cost increases and rising competition in the U.S. We are raising our 12-month target price to $27 from $23, based on a p-e multiple of 10.6 times fiscal 2006 earnings, near Honda's 3-year average.

Nvidia (NVDA ): Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: Amrit Tewary

Nvidia sees January-quarter revenues of $560 million to $570 million, compared to prior guidance of about $516 million. In addition, the company sees gross margin for the quarter at 33.5% to 34.5%, compared to its prior expectation of 33.3%. We are impressed with recent momentum for new GPU products, and expect Nvidia to continue to gain share in the near term. We are raising our January-quarter earnings per share estimate to 21 cents from 17 cents, our full fiscal 2005 (ending January) estimate to 50 cents from 47 cents, and our fiscal 2006 to 87 cents from 83 cents. We are raising our 12-month target price to $30 from $26, based on our revised p-e and price-to-sales analyses.

SBC Communications (SBC ): Maintains 3 STARS (hold)

Analyst: Todd Rosenbluth

At an analyst meeting to discuss the merits of its planned deal for AT&T Corp., pending approvals, SBC highlighted expected synergies, primarily to result from anticipated workforce reductions. We remain skeptical of the deal, given that, despite continued cost cutting efforts in the past two years, SBC and AT&T's EBITDA margins have been weaker than peers. But, we believe that SBC will have opportunities for growth in offering its broad bundle of services to consumers and businesses nationwide. With 5% dividend yield, we would hold SBC shares for total return potential.

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