S&P Keeps MCI at Hold, Qwest at Sell

Plus analysts' opinions on Amazon.com, CNET Networks, and more

MCI (MCIP ): Maintains 3 STARS (hold)

Qwest Communications (Q ): Maintains 2 STARS (sell)

Analyst: Todd Rosenbluth

According to the Wall Street Journal, Qwest Communications is in talks to acquire MCI, as part of what we think may be the second round of consolidation between a Bell and traditional long distance carrier with large business customer base. In our view, while a potential deal may offset some of Qwest's challenges by improving its network capabilities, we think the telcos' relatively high operating cost structure and what we see as Qwest's highly leveraged balance sheet would make the deal additionally problematic. We think more clarity will emerge before companies report fourth-quarter results on Feb. 15.

Amazon.com (AMZN ): Reiterates 3 STARS (hold)

Analyst: Jason Asaeda

December-quarter pro forma earnings per share of 35 cents, vs. 29 cents misses our estimate by 3 cents. While we think aggressive pricing, new products, and shipping promotions will enable Amazon.com to grow sales 20% in 2005, we see margins continuing to be pressured by free shipping costs and heavy spending on marketing support and technology/content development. With the company projecting $115 million in full-year option expense, we are cutting our 2005 earnings per share estimate by 10 cents to $1.15. With capital expenditures increasing sharply to support growth, our 12-month target price drops by $2 to $38, based on discounted-cash-flow analysis.

CNET Networks (CNET ): Downgrades to 2 STARS (sell) from 3 STARS (hold) and lowers target price

Analyst: Scott Kessler

Excluding one-time items, CNET posted fourth-quarter earnings per share of 9 cents, vs. 5 cents, equal to our forecast. Revenues rose 21%, paced by the interactive segment, but offset by a decline at the publishing unit. Given anticipated challenges to CNET's non-Internet businesess, we are lowering our 2005 revenue estimate to $345 million from $352 million. But, given the more favorable revenue mix we see, we are leaving our 2005 earnings per share estimate at 20 cents. Recent execution issues and increasing competition for traffic are concerns to us. We are lowering our 12-month target price to $9 from $9.50, based on revised discounted-cash-flow analysis.

Gillette (G ): Reiterates 3 STARS (hold)

Analyst: Howard Choe

Gillette posted fourth-quarter earnings per share of 41 cents, vs. 35 cents, a penny above our estimate, but in line with the Street. Sales growth was very strong, in our view, up 19% (15% excluding-foreign exchange), led by oral care and Braun categories and developing markets and Europe. M3Power continues to sell well and consumers are trading up to higher priced products in developing markets. Operating margins were flat as planned higher advertising and promotional spending was offset by overhead savings and improved operational efficiencies. We have a favorable outlook for Gillette in 2005, given new products planned in female shaving and oral care.

Sun Microsystems (SUNW ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Sun held an analyst meeting yesterday, outlining its utility and grid computing services. Although it believes it has advantages in this area and will drive pricing for this emerging market, we are cautious based on the business model implications to Sun's financials. We think Sun's revenue visibility is limited, and adding fixed costs to support its grid offerings seems risky. Still, we're pleased that the company highlighted several areas to improve its cost structure, and that it has $7.5 billion in cash/investments. Sun is trading at price/sales of 1.3 times, in line with peers.

Alcatel (ALA ): Maintains 3 STARS (hold)

Analyst: Kenneth Leon, CPA

Shares are down over 12% today after Alcatel posted 4 cents fourth-quarter earnings per ADS, vs. a 53-cent loss, before special items, well below our 31 cents earnings estimate. Sales fell 3% as declines in the fixed and mobile units (2/3 of total sales) were partly offset by 12% growth in the enterprise unit. We see 4% sales growth in 2005, assuming a rebound in mobile, but weakness in fixed lines. We are lowering our target price to $13 from $16, and our 2005 earnings per ADS estimate to 75 cents from 96 cents. We set our 2006 estimate at 90 cents. Priced at 19 times our 2005 estimate, near peers, we would hold Alcatel.

PepsiCo (PEP ): Maintains 5 STARS (strong buy)

Analyst: Renu Joy

Fourth-quarter earnings per share before special items at 58 cents, vs. 52 cents is as expected. Fourth-quarter volumes gained a better-than-expected 6% on strong international growth. Division profits grew 10%, with Frito-Lay North America up 6%, PepsiCo Beverages North America up 15%, PepsiCo International up 16%, and Quaker Foods North America down 1%. We see a 9% gain in 2005 operating income, free cash flows above $4.1 billion, and foreign earnings repatriation of up to $7.5 billion. Our 2005 estimate remains $2.60, a 12% gain. Given our view of improving earnings per share visibility and consistency, our 12-month target price goes to $65 from $62.

Royal Dutch Petroleum (RD ): Reiterates 3 STARS (hold)

Analyst: Tina Vital

The Royal Dutch/Shell Group posted fourth-quarter earnings from continuing operations of $4.34 billion, vs. $2.22 billion, $0.9 billion below our estimate. Hydrocarbon production declined 3.3% in 2004, and we expect drop in excess of 5% in 2005. 2003 proved reserves were again negatively revised, by 1.4 billion barrels of oil equivalent (boe) to 12.95 billion boe. The Group estimates a subpar organic reserve replacement rate of 45% to 55% for 2004, below 100% for 2005, but targets an average of 100% for 2004 to 2008. Our revised price and margin projections, using a blend of discounted-cash-flow and relative valuations, lead us to raise our target price by $5 to $61.

Aflac (AFL ): Maintains 4 STARS (buy)

Analyst: Gregory Simcik, CFA

At its analyst presentation, Aflac announced it will begin expensing stock options starting Jan. 1, earlier than mandated by accounting authorities. As a result, we are lowering our 2005 operating earnings per share estimate to $2.62 from $2.68, to account for the added expense. We are also modestly lowering our 12-month target price to $45 from $46, based upon a multiple of 17 times our 2005 earnings per share estimate, in-line with our earnings per share growth forecast. We still believe Aflac's Japan sales turnaround could continue into 2005 and overall results may benefit from a weaker dollar, vs. the yen.

    Before it's here, it's on the Bloomberg Terminal.