S&P Cuts AIG, ChevronTexaco
American International Group (AIG ): Downgraded to 3 STARS (hold) from 4 STARS (buy)
Analyst: Catherine Seifert
Published reports indicate that Federal investigators are probing a finite reinsurance transaction AIG conducted with General Re, a unit of Berkshire Hathaway (BRK.A ). At issue is whether this transaction (and most others like it) represented a transfer of risk or a "financial smoothing" technique. Although we view AIG's fundamentals positively, and we believe AIG remains financially strong, we believe this growing investigation removes a catalyst from the shares. We are lowering our 12-month target price to $72 from $85, more in line with its peer group average.
ChevronTexaco (CVX ): Downgrades to 3 STARS (hold) from 5 STARS (strong buy)
Analyst: Tina Vital
Per ChevronTexaco's 10-K, released yesterday, 2004 proved oil and gas reserves dropped by 11% to 8.2 billion barrels of oil equivalent, reflecting a 680 billion cubic feet negative revision to its U.S. natural gas reserves (similar to downgrades in 2002 and 2003). The overall downward revision was about twice the 450 to 500 million barrels of oil equivalent (250 to 300 million on asset sales, plus 200 million from the impact of high oil prices on production-sharing agreements) we were expecting after ChevronTexaco's warning at its December analyst meeting. Blending our discounted-cash-flow and relative valuations, we are keeping our 12-month target price at $65. Yielding about 2.6%, we would hold ChevronTexaco.
DuPont (DD ): Maintains 2 STARS (sell)
Analyst: Richard O'Reilly, CFA
We are raising our 12-month target price to $49 from $38 to reflect higher chemical peer p-e's and our revised discounted-cash-flow model. We are keeping our 2005 earnings per share outlook of $2.70, vs. operating $2.38 for 2004. We see the company achieving solid volume gains as a result of U.S. industrial production growth and higher selling prices driven in part by new product introductions. But at nearly 20 times our 2005 earnings per share estimate, we think Dupont is at an excessive premium to the S&P 500 index and would recommend selling its shares.
Biogen Idec (BIIB ): Keeps 3 STARS (hold)
Analyst: Frank DiLorenzo, Robert Gold
Biogen Idec says a second patient using the multiple sclerosis drug Tysabri in combination with Avonex is confirmed to have progressive multifocal leukoencephalopathy (PML), a rare and often fatal disease of the central nervous system. We note that the two patients who have contracted PML were using the combination therapy, and that no reports of PML in patients using Tysabri alone have yet surfaced. We still believe Tysabri can relaunch in 2006 as a monotherapy, but that its revenue potential has been significantly impaired. Our 12-month target price stays $45.
Aon Corp. (AOC ): Maintains 2 STARS (sell)
Analyst: Gregory Simcik, CFA
According to unconfirmed Chicago Tribune reports, New York, Illinois, and Connecticut attorneys general may announce a $190 million settlement with Aon on contingent commission and reinsurance tying probes. The deal may include a 2.5 year installment payments and a public apology, but no admission of guilt, or penalties. We see these terms closely mirroring Marsh & McLennan's deal and think investors may have, for the most part, already anticipated them. We think Aon still faces challenges from soft market, high competition, possible client defections, and margin pressure from lost contingents.
Hilton Hotels (HLT ): Reiterates 3 STARS (hold)
Analyst: Thomas Graves, CFA
We are encouraged to see the authorization for repurchase of up to 50 million common shares. We are also impressed that Hilton has bought back 5.5 million shares year-to-date. In 2005, we expect that timeshare or hotel investments, plus stock repurchases, will be Hilton's preferred use of discretionary cash flow. We are keeping our 2005 earnings per share estimate at 73 cents. Based on that estimate, Hilton shares are trading at a p-e premium of about 90% to the S&P 500. However, we expect the shares to be bolstered by cash flow, earnings per share, and business travel outlooks, and we are keeping our 12-month target price at $23.
Weight Watchers (WTW ): Reiterates 4 STARS (buy)
Analyst: Howard Choe
Excluding unusual items, Weight Watchers posted fourth-quarter EPS of 32 cents, vs. 35 cents, one cent below our estimate but in line with Street forecasts. On a normalized basis (for one less week in the quarter), sales rose 9% on the strength of international attendance and product sales. Earnings before interest and taxes, or EBIT, fell 11% on lower attendance and higher general and administrative expenses. In our view, the key points are that North American recruitment finally turned positive in February and Weight Watchers was able to take pricing globally. Given the company's more positive outlook for 2005, we are raising our 2005 EPS estimate to $1.88 from $1.86. Our target price stays at $52.