S&P: Still Buy Verizon, Hold MCI

Analyst Todd Rosenbluth also keeps Qwest and BellSouth at sell. Plus analysts' opinions on GM, AIG, and others

MCI (MCIP ): Maintains 3 STARS (hold) Verizon (VZ ): Maintains 4 STARS (buy) Qwest Communications (Q ): Maintains 2 STARS (sell)

Analyst: Todd Rosenbluth

Verizon Communications has agreed to acquire MCI in a largely stock-based deal valuing MCI at Friday's closing price. The planned merger, which awaits shareholder and regulatory approval, beats out the offer for MCIP from Qwest, and comes on the heels of SBC Communications planned deal for AT&T. If approved, we expect Verizon to combine its efficient consumer-oriented wireline operations and strong wireless offering with MCI's national network and enterprise customer base.

Our initial view is that the planned purchase of MCI, pending approvals, is a better transaction for Verizon than the recently announced deal by peer SBC to acquire AT&T. Benefits we see include synergies from inefficiencies at MCI and a purchase price lower than what SBC is paying for AT&T. In our view, Verizon has a track record of successful wireline integrations. However, we see merger risk, given the possibility of other suitors for MCI, regulatory review, and integration challenges. We view Verizon fundamentals as stronger than peers.

BellSouth (BLS ): Maintains 2 STARS (sell)

Analyst: Todd Rosenbluth

BellSouth's two largest peers, Verizon Communications and SBC Communications have each agreed to acquire a telco with national network capabilities and a sizable enterprise customer bases, pending shareholder and regulatory approvals. While BellSouth remains focused on growing through consumer-oriented wireless and broadband offerings, we believe that these planned transactions leave BellSouth in a precarious position as a stand-alone entity. Despite a 4% dividend yield we would sell BellSouth shares, which trade above our 12-month target price of $24.

General Motors (GM ): Reiterates 2 STARS (sell)

Analyst: Efraim Levy, CFA

GM agrees to pay Fiat S.p.A. $2.0 billion (1.55 billion euro) to terminate their Master Agreement that includes a put option that would have let Fiat force GM to buy Fiat Auto. GM will also return its 10% stake in Fiat Auto to Fiat. The payment is in the high end of the range we expected, but the deal will remove potential for pressure on GM's balance sheet were it to add Fiat Auto's debt. GM will incur a $1.40 net charge per share, not included in our 2005 estimate of $5.15. Based on discounted-cash-flow, peer comparative, and historical p-e analyses our 12-month target price remains $34.

American International Group (AIG ): Maintains 4 STARS (buy)

Analyst: Gregory Simcik, CFA, Cathy Seifert

AIG receives SEC And NY Attorney General Subpoenas on non-traditional insurance products and certain assumed reinsurance transactions. We believe the subpoenas may be part of industry-wide investigations by legal and regulatory officials on some limited risk insurance products to determine whether they involve enough risk transfer to be considered insurance for reporting purposes. While we believe officials may still be fact-finding at this stage, we note that AIG's recent Brightpoint settlement with authorities, including the SEC, involved similar products.

Cisco Systems (CSCO ): Reiterates 5 STARS (strong buy)

Analyst: Ari Bensinger

While we a see heightened U.S. carrier consolidation creating a healthier end-market for telecom equipment, we think it will likely disrupt near-term telecom equipment orders. With the majority of its revenue derived from enterprise customers (75% of sales), we do not expect Cisco to be negatively impacted by any short-term hold on telecom orders. Moreover, we note that approximately two-thirds of its service router business comes from outside the U.S. We view Cisco as a core holding for investors seeking exposure to what we view as an improving networking environment.

Charles Schwab (SCH ): Reiterates 2 STARS (sell)

Analyst: Robert Hansen, CFA

Schwab reports about a 1% decline in trading volumes and client assets in January, vs. December. We are impressed that trading volumes have held up relatively well thus far in 2005. However, we see difficult year-over-year comparisons and increased price competition. We expect cost and headcount reductions, and growth in asset-based fees to offset recent commission rate reductions. Our 2005 earnings per share estimate stays 45 cents. Our 12-month target price remains $10, or about 22 times our 2005 earnings per share estimate. At 24 times our 2005 earnings per share estimate, a premium to peers, we view the shares' valuation as unattractive.

Nissan Motor (NSANY ): Maintains 3 STARS (hold)

Analyst: C. Lee, James Peters, CFA

Nissan Motor reports 2.7% higher December-quarter net income of $1.3 billion, in line with our expectation. Strong revenue growth from better-than-expected vehicle unit sales more than offset higher sales and marketing expenses and currency impact, although operating margins narrowed. Given our expectation for continued dollar weakness and rising raw material costs, we are lowering our earnings per ADR forecast to $2.19 from $2.30 for fiscal 2005 (Mar.), and to $2.33 from $2.47 for fiscal 2006. We maintain our $24 12-month target price, based on Nissan Motor's 3-year average price-to-book value.

Blockbuster (BBI ): Reiterates 2 STARS (sell)

Analyst: Amy Glynn, CFA

The Wall Street Journal says Blockbuster's hostile bid to acquire Hollywood Entertainment may be facing Federal Trade Commission opposition. The FTC in 1999 deemed a proposed Blockbuster/Hollywood merger anticompetitive, but Blockbuster now argues that the video rental market has changed and should now include companies such as Netflix and Wal-Mart. We agree, and think it is likely that proposed deal will get clearance. Separately, the FTC is allowing Movie Gallery's bid for Hollywood to go forward. Above our 12-month target price of $8.50, we would sell Blockbuster.

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