S&P Cuts Ford to Sell

Plus analysts' opinions on Microsoft, Avaya, and more

Ford Motor (F ): Downgrades to 2 STARS (sell) from 3 STARS (hold)

Analyst: Efraim Levy, CFA

We are cutting our 2005 earnings per share estimate to $1.35 from $1.77 and our 12-month target price to $9 from $12. We are concerned about management's ability to forecast performance, following the sharp change from March guidance. In our opinion, Ford's multiples should exceed General Motor's, as Ford's net margins should be higher. We expect the company to cut costs more aggressively, but we see sales and margin pressure in 2006 in the important light truck/SUV category as GM brings out new vehicles in that category. We see Ford's annual 40 cents per share dividend at risk for reduction.

Microsoft (MSFT ): Reiterates 5 STARS (strong buy)

Analysts: Megan Graham-Hackett, Jonathan Rudy, CFA

Microsoft agrees to pay Gateway $150 million over four years to resolve all legal issues between them. Gateway said it plans to use the funds for marketing and other initiatives; however, we are leaving our estimates for Gateway unchanged. Microsoft also says it will take a $550 million charge to add to its reserves for antitrust claims. We continue to view favorably Microsoft's reduction of outstanding litigation risk, and do not anticipate any impact on our 2005 (ending June) opererating earnings per share estimate of $1.27. We reiterate our strong buy on Microsoft shares, trading at a discount to our discounted-cash-flow-based 12-month target price of $33.

Avaya (AV ): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Aryeh Bensinger

We are lowering our March-quarter earnings per share estimate to 16 cents from 19 cents, reflecting what we believe has been a difficult enterprise spending environment. We think the industry migration toward internet telephony, while sizable, will be a more prolonged upgrade cycle than we had first anticipated. Based on slower sales growth assumptions, we are lowering our fiscal 2005 (ending September) earnings per share estimate by 5 cents to 73 cents. We are lowering our 12-month target price to $13 from $18, or about 17 times our fiscal 2005 estimate, a steep discount to peer average to account for our forecast of sales growth below industry average.

Circuit City (CC ): Reiterates 3 STARS (hold)

Analyst: Amy Glynn, CFA

February-quarter earnings per share of 43 cents, vs. 46 cents is below our 48 cents estimate. We calculate that lease accounting revisions lowered earnings per share by about 2 cents, partly offset by a 1-cent gain related to an asset sale. Gross margin widened to 24.4% from 23.8% due to inclusion of the international segment, but the domestic gross margin narrowed on the competitive pricing environment. Circuit City sees fiscal 2006 (ending February) total sales growth of 3% to 6%, comparative-store sales growth in the low single-digits and operating margin of 1.3% to 2.3%. We are reviewing our estimates and will provide an update after Circuit City's 10 a.m. conference call.

3Com (COMS ): Downgrades to 1 STAR (strong sell) from 3 STARS (hold)

Analyst: Ari Bensinger

We believe that Cisco's newly instituted leasing program for small and medium-sized businesses will impinge on 3Com's core target market. In addition, with operating expense as a percentage of sales at over 60%, we think that 3Com needs to do a better job of resizing its cost structure. In the absence of material revenue growth, we do not see the company returning to profitability before fiscal 2007 (ending May). We are lowering our 12-month target price by $1 to $3, or 1.3 times cash, a discount to peers to account for our view of 3Com's negative operating momentum.

eBay (EBAY ): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Shares are down about 8% in April and have set a new 52-week low today. We believe the decline is due to concerns about first-quarter results and the 2005 outlook to be provided on Apr. 20. We think first-quarter revenues and earnings per share will probably not be materially higher than consensus. eBay's recent replacement of its boutique ad agency with the larger BBDO Worldwide suggests to us that its disappointing fourth-quarter was related in part to its advertising strategy. Given an increase in the stock's volatility, we are raising the discount rate assumption in our discounted-cash-flow model and cutting our target price to $40 from $46.

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