S&P Cuts Clear Channel to Strong Sell

Analyst Tuna Amobi thinks the broadcaster's revenues may take a bigger-than-expected hit from its revamped business plan. Plus: Opinions on MCI, Qwest, and more

Clear Channel (CCU ): Downgrades to 1 STAR (strong sell) from 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

Clear Channel offers, in our view, a mixed update on its Less-Is-More business plan. With first-quarter radio ads pacing down 5.6%, vs. guidance of 3% to 5% rises for some peers, we think 2005's hit from the less-is-more (L-I-M) plan may be more than we expected, as lost revenues on less spot loads could outweigh a relatively higher unit pricing and inventory sell-outs from mix shifts from 60-second spots to 30 seconds and 15 seconds. With L-I-M uncertainty, we see flat 2005 margins. We are cutting our 2005 estimate by 2 cents to $1.48, on 5% fewer shares. We are lowering our target price by $8 to $26, on discounted-cash-flow and relative ratio of p-e to long-term free cash flow growth.

MCI (MCIP ): Maintains 3 STARS (hold)

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

Analyst: Todd Rosenbluth

As we expected, Qwest revised its bid for MCI, offering a larger cash component and protection against a decline in Qwest shares in an effort to break up the agreed-upon merger between MCI and Verizon Communications. We believe that the fundamentals for Qwest remain weaker than for Verizon, but think shareholder pressure will force MCI to give added consideration to Qwest's offer. MCI was scheduled to report fourth-quarter results and hold a conference call on the morning of Feb. 25. We are projecting earnings per share of 41 cents. With a highly leveraged balance sheet and ongoing operation losses, we believe Qwest needs MCI's cash and network capabilities.

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


MCI received a revised bid from Qwest Communications with a larger cash component and protection against a decline in Qwest shares, as Qwest seeks to break up the agreed-upon merger between MCI and Verizon. We think that Verizon's fundamentals are stronger than Qwest's, but that shareholder pressure will force MCI to give consideration to Qwest's offer. We also believe that despite Verizon's deep pockets and its network synergy opportunities, it will be reluctant to raise its offer for MCI, given its other growth initiatives.

International Business Machines (IBM ): Reiterates 5 STARS (strong buy)

Analyst: Megan Graham-Hackett

In its 10K filing, IBM disclosed that certain sales related to 3rd party hardware were improperly accounted for by its Japan unit. The sales represent 0.2% of IBM's 2004 sales, but there was no impact on gross profit or cash flow. IBM also disclosed that it may repatriate some $8 billion under the American Jobs Creation Act. Finally, IBM noted that stock option expenses fell in 2004 to 55 cents per share, below our estimate. In our opinion, the misstated sales represent an anomaly and not any broader abuse. We view IBM attractive, with shares trading below our discounted-cash-flow-derived $115 target price.

Metro-Goldwyn-Mayer (MGM ): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

Fourth-quarter GAAP earnings per share of 16 cents after a 3-cent stock option expense, vs. 25 cents, was aided by a $10.7 billion tax benefit. Feature films included the early theatrical debut of Hotel Rwanda, plus home video titles Walking Tall, Saved, and Pink Panther. The TV segment is riding its Stargate series. After the Department of Justice's approval of the pending Sony-led acquisition, MGM awaits final okay from Europe. Meanwhile, CFO Dan Taylor was recently tapped as President-in-waiting, a move we think signals a shift from feature releases to the mining of MGM's vast library of titles. Our 12-month target price of $12 reflects the pending deal.

Colgate-Palmolive (CL ): Reiterates 5 STARS (strong buy)

Analyst: Howard Choe

While still in the early days of a restructuring and business-building plan, the company showed today at the CAGNY conference that it is executing on plan. Plant and regional organizational consolidation is underway, and innovation and marketing resources are being added. The near-term outlook for new product innovation seems promising to us, with new products in oral, home, and personal care. Recent marketshare trends are also positive. Given dominance in oral care, and with profit-growing opportunities ahead, we view Colgate-Palmolive as attractively valued at a 7% discount to peers.

MGM Mirage (MGG ): Reiterates 3 STARS (hold)

Analyst: Thomas Graves, CFA

The Nevada Gaming Commission has approved MGM's proposed merger with Mandalay Resort Group. Pending any approvals still needed, we expect the deal to close by the end of March. By that time, we expect that MGM will have agreed to sell its equity in one of the Detroit casinos in which it or Mandalay had a majority interest. We are keeping our 12-month target price of $80. We expect optimism about future expansion prospects (e.g., Macau, Las Vegas) to help MGM shares to continue trading at a premium p-e to other gaming stocks, and to the S&P 500.

H&R Block (HRB ): Maintains 3 STARS (hold)

Analyst: Andrea West, CFA

H&R Block posted January-quarter earnings per share of 55 cents, vs. 59 cents, above our 48 cents forecast. Results were helped by 11% higher tax services revenues and receipt of an estimated 6 cents per share litigation payment. We see weaker profitability at mortgage and investment services operations continuing to pressure results, partly offsetting what appears to be a reasonably solid early start to the 2005 tax season. We are increasing our fiscal 2005 (ending April) earnings per share estimate to $3.64 from $3.58, and our 12-month target price to $51 from $50 based on a blend of our updated discounted-cash-flow and relative valuation models.

Ingram Micro (IM ): Reiterates 4 STARS (buy)

Analyst: Amy Glynn, CFA, Gary McDaniel

Fourth-quarter earnings per share 40 cents, vs. 34 cents is 6 cents ahead of our estimate. Revenues increased 10%, ahead of our 6% forecast, aided by $400 million in sales from the Tech Pacific acquisition and by European currency gains. Both gross and operating margins increased 26 basis points from a year ago, but operating margins in North America fell 37 basis points. Ingram expects to report revenues of $7 to $7.2 billion in the first quarter, a gain of about 12% to 15%. Our 12-month target price remains $21. We are placing our earnings estimates under review pending the company's conference call.

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