S&P Keeps Verizon at Buy, MCI at Hold

Analyst Todd Rosenbluth thinks MCI is an appealing target for a Baby Bell. Plus analysts' opinions on Qwest, Prudential, and more

MCI Inc. (MCIP ): Maintains 3 STARS (hold)

Verizon Communications (VZ ): Maintains 4 STARS (buy)

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

Analyst: Todd Rosenbluth

According to The Wall Street Journal, Verizon made an informal bid to acquire MCI that is close to the $6.3 billion tentative offer reportedly made for MCI by Qwest Communications. We believe MCI's enterprise customer base, nationwide network, and $5.6 billion cash balance make it an appealing target for a Baby Bell, though we think its relatively low margins, sizable liabilities and brand name may create integration challenges. We contend that Verizon's operations are stronger than peer Qwest's due to what we see as wireless strength, wider margins and better balance sheet.

Prudential Financial (PRU ): Maintains 3 STARS (hold)

Analyst: Gregory Simcik, CFA

Prudential reported fourth-quarter adjusted net EPS of 96 cents, vs. 64 cents one year earlier, 16 cents above our estimate. Insurance and investment division results were higher, with an 8-cent gain from a lower tax rate and unlocking of deferred policy acquisition costs. We think Pru still has several 2005 growth sources, including potential Wachovia venture improvements. We are raising our 2005 adjusted net EPS estimate to $4.52 from $4.25, including our view of benefits from the weaker U.S. dollar. Our 12-month target price rises to $63 from $51 on a higher p-e of 14 times our 2005 estimate to reflect growth opportunities we see.

Ericsson (ERICY ): Maintains 3 STARS (hold)

Analyst: Ari Bensinger

Ericsson posted fourth-quarter translated earnings per ADS of 52 cents, vs. 28 cents, above our 48 cents estimate. Seasonally strong sales growth and controlled operating expenses outweighed weakening gross margin. While we are impressed by Ericcson's strong profitability ratios, a rising mix of lower-margin 3G sales causes us to believe that gross margins will continue to deteriorate. Ericcson maintains its forecast for mobile system market growth of 2% to 5% in 2005. We are keeping our 2005 earnings per ADS estimate at $1.75. Based on our discounted-cash-flow and relative analyses, our 12-month target price remains $31.

XM Satellite Radio (XMSR ): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

XM's fourth-quarter net adds came in at 713,000, as churn improved a bit more than we projected. Before an estimated 20-cent de-leveraging charge, the fourth-quarter loss of 73 cents, vs. a loss of $1.12 is wider than our 6-cent loss estimate, reflecting higher-than-expected subscriber acquisition costs and cost per gross add, partly offset by lower research and development. XM will launch the Major League Baseball Channel this month, as it targets portable and wearable device market with new products. We view fourth-quarter subscriber costs as an anomaly, and still see a $2.21 loss for 2005 and a $1.00 loss for 2006. Our 12-month target price remains $35.

Shire Pharmaceuticals (SHPGY ): Reiterates 3 STARS (hold)

Analyst: David Seemungal

Shire's ADS price is indicated lower after a decision by Health Canada to suspend sales of the the company's Adderall XR in the Canadian market following a review of the safety data and reports of sudden deaths in patients taking Adderall or Adderall XR. Health Canada did not revoke the product's approval, however, and we do not think FDA has plan for any immediate changes in labeling. We think drug had Canadian sales of $10 million and total sales of $617 million in 2004. We are trimming our 2005 earnings per share estimate by a penny to $2.33, and lowering our target price by $6 to $32 to reflect our view of increased risk.

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