S&P Keeps Hold on Apple

Plus analysts' opinions on McDonald's, Texas Instruments, and more

Apple Computer (AAPL ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

March-quarter non-GAAP earnings per share of 35 cents, vs. 7 cents beats our 21 cents estimate on a wider gross margin, aided by lower component costs, and a sharp drop in operating expenses compared to our model. Revenues rose 70% to $3.24 bilion, led by iPod growth. iMac units also beat our estimate. However, Apple's quarter-over-quarter revenue growth guidance for June-quarter is a bit below our forecast, but we are still raising our fiscal 2005 (ending September) earnings per share estimate by 26 cents to $1.29. Shares trade above peers on an enterprise value/sales basis, but with Apple's potential to leverage iPod success into new markets, we view shares as worth holding.

McDonald's (MCD ): Reiterates 4 STARS (buy)

Analyst: Dennis Milton

We are lowering our 2005 earnings per share estimate by 12 cents, to $1.96, to reflect McDonald's decision to expense stock options throughout 2004. We are maintaining our 2005 Standard & Poor's Core earnings per share estimate, also $1.96, and our 12-month target price of $38. At 16 times our 2005 Core earnings per share estimate, McDonald's shares trade in line with peer S&P Core Earnings valuations. We believe a premium on the shares is warranted, given our opinion that the company has strong sales momentum and superior product development capabilities.

Texas Instruments (TXN ): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Ahead of first-quarter results, we estimate earnings per share of 23 cents, on sales down 5.9% from fourth-quarter to $2.97 billion, with a gross margin of 45.2%. Inventories fell $100 million in the fourth-quarter, but we believe they will likely head higher in the first quarter, reflecting an increase in work-in-process inventory. Although Texas Instrument shares are down from a year ago, we think current valuation multiples are warranted, based on our expectation of more moderate industry growth this year. Also, we think the stock's valuation fairly reflects what we see as elevated macro risks and some lingering channel inventory concerns.

PepsiCo (PEP ): Maintains 5 STARS (strong buy)

Analyst: Rick Joy

Pepsico posted first-quarter earnings per share of 53 cents, vs. 46 cents, 2 cents above our estimate. Worldwide volume growth of 4% was slightly better than we forecast. Division operating income grew a strong 10%, with PepsiCo International rising 20%, Pepsi Beverages North America up 8%, Frito-Lay N.A. up 6%, and Quaker Foods N.A. up 18%. Seeing continued energy and commodity headwinds, we are keeping our 2005 earnings per share estimate at $2.60 (excluding the 53rd week). We view shares as attractive, given our view of brand momentum, impressive product innovation pipeline and strong cash flows. Our 12-month target price is $65.

Fairchild Semiconductor (FCS ): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Fairchild posted first-quarter operating earnings per share of 10 cents, vs. 17 cents, in line with our estimate. Sales fell 4.4% from fourth-quarter, and gross margin fell 250 basis points sequentially, in our view a reflection of aggressive price competition for standard products and unfavorable mix shift in the analog business. Fairchild projects second-quarter sales flat, vs. first quarter and a flat to slightly higher gross margin. On lower sales and margin assumptions, we are cutting our second-quarter earnings per share estimate to 7 cents from 15 cents, and full 2005 to 43 cents from 65 cents. We are lowering our target price by $3 to $15, based on p-e and price-to-sales analyses.

Advanced Micro Devices (AMD ): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Following AMD's earnings call, we are cutting our second-quarter estimate to a 3-cent loss from 3 cents earnings per share, and our full 2005 earnings per share estimate to 26 cents from 32 cents, primarily due to lower sales and margin expectations for the unprofitable flash memory business. However, completion of the planned IPO spin-off of the company's 60%-owned Spansion flash memory business would eliminate an unprofitable business and cause us to revisit our estimates. No timetable has been announced yet for the proposed IPO. We are raising our 12-month target price to $19 from $17, based on our revised price-to-sales analysis.

Mentor (MNT ): Reiterates 3 STARS (hold)

Analyst: Robert Gold

In a decision surprising to us, an FDA advisory panel voted 7 to 2 to recommend approval of Mentor's silicone gel breast implant premarket approval, with conditions. Although the decision is clearly favorable for the company, we see only a 50% probability that it launches without presenting more safety data. Should the FDA approve, however, we expect significant earnings acceleration as Mentor would be the sole player in the U.S. market. Our fiscal 2006 (ending March) earnings per share estimate remains $1.55 pending an FDA decision, but we are raising our target price by $10 to $45 to reflect possible approval later this year.

Infosys Technologies (INFY ): Maintains 4 STARS (buy)

Analyst: Stephen Crane

March-quarter earnings per ADS of 47 cents, vs. 29 cents exceed our 44 cents estimate. But Infosys's ADSs are down about 5% this morning as it offers fiscal 2006 (March) guidance we find disappointing. March-quarter revenue grew 50%, we think a reflection of a revival of U.S. outsourcing contracts, spurred by the outcome of the U.S. elections. Pricing continues to be stable, a factor we consider positive in a very competitive environment. We are raising our fiscal 2006 earnings per ADS estimate to $1.92 from $1.63 on higher expected billing rates. Our target price remains $75, based on peer ratios of p-e to growth.

Southwest Airlines (LUV ): Reiterates 4 STARS (buy)

Analyst: James Corridore

First-quarter earnings per share of 9 cents, vs. 3 cents beats our 5 cents estimate. Passenger levels benefited from Easter in March this year. However, Southwest was able to increase yields and cut unit costs, which we see as ongoing positives. Southwest expects a weak April, due to Easter, but bookings for May and June are "satisfactory." Southwest would have lost money without hedging gains, but it has hedge positions through 2009. We think the company should see improving market share growth and unit revenues. Our 12-month target price is $18, 33 times our 2005 earnings per share estimate, in the middle of Southwest's historical average.

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