S&P Downgrades IBM to Hold

Plus analysts' opinions on General Electric, Citigroup, Eli Lilly, and more

IBM Corp. (IBM ): Downgrades to 3 STARS (hold) from 5 STARS (strong buy)

Analyst: Megan Graham-Hackett

We are cutting our 2005 earnings per share estimate to $4.60 from $5.11, including stock option expenses, due to our forecast for lower 2005 revenues. Our S&P Core earnings per share estimate, including pension costs, also falls to $2.75 from $3.25. IBM cited internal execution issues for its first-quarter shortfall, and noted improvement in its service pipeline, but we are concerned that uneven economic growth data and higher oil prices are giving corporate customers pause beyond a first-quarter seasonal slowdown. Despite disappointing first-quarter, with shares trading below peer average on a price/sales basis and below our $87 target price, hold.

General Electric (GE ): Reiterates 3 STARS (hold)

Analyst: Robert Friedman, CPA

Earnings increases of 10%-plus in ten of GE's 12 divisions drove a 17% advance in S&P Core earnings per share for GE to 35 cents, we calculate. However, we would advise against adding to GE positions. Athough we applaud CEO Immelt's steps to boost the company's presence in businesses that post recurring earnings streams and strong return on equity, we believe that GE's enormous revenue and equity base dramatically reduce the chances for sustainable 10%-plus earnings per share increases and 20%+ return on equity. We believe the stock is not trading at enough of a discount to provide a sufficient margin of safety for an upgrade.

Citigroup (C ): Reiterates 5 STARS (strong buy)

Analyst: Evan Momios, CFA

Including the operations of businesses that are subject to a pending sale transaction, Citigroup posted first-quarter operating earnings per share of $1.04, vs. $1.01, 2 cents above our estimate. Results include expenses of 5 cents related to cost reduction initiatives. Strong consumer volumes globally and lower credit losses offset the negative impact of rising short-term interest rates and soft equity markets. We are raising our 2005 operating earnings per share estimate by 2 cents to $4.30. Our 2006 estimate remains $4.75. We are keeping our 12-month target price of $57, or 12 times our 2006 earnings per share estimate, in line with peers.

Eli Lilly (LLY ): Reiterates 3 STARS (hold)

Analyst: Herman Saftlas

A court decided in favor of Lilly in its Zyprexa patent litigation against generic challengers, lifting a heavy burden from the stock. The company's patent was found valid and enforceable on all accounts, indicating to us that Lilly is also likely to prevail in the appellate court. However, Zyprexa scripts continue to erode under more intense competition. Recent drug trends also appear to be negative for Straterra and Evista. We like Lilly's pipeline, but think its shares are adequately valued, based on our calculated 30% premiums to peer p-e and price/sales. Our 12-month target price remains $60.

Genentech (DNA ): Reiterates 5 STARS (strong buy)

Analyst: Frank DiLorenzo, CFA

The National Cancer Institute announces preliminary results from the Phase III trial of Avastin plus chemotherapy in first-line metastatic breast cancer, showing a four month delay in disease progression compared to chemo alone. We see a potential FDA filing in this indication by year end, and believe breast cancer setting could expand Avastin's opportunity by over $1 billion. We also expect positive results in kidney cancer, and possibly ovarian cancer. Our 2005 earnings per share estimate remains $1.13. We are raising 2006's earnings per share to $1.53 from $1.49. On revised net present value analysis, our target price rises to $80 from $71.

Charles Schwab (SCH ): Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analyst: Robert Hansen, CFA

First-quarter earnings per share of 11 cents, vs. 12 cents matches our estimate against a comparison we view as difficult. We are impressed by higher trading volumes, lower operating costs, and a more competitive commission rate schedule. We are raising our 2005 earnings per share estimate to 50 cents from 45 cents, based on our expectation of strong net client inflows, growth in mutual fund fees, and more cost and headcount reductions. Down about 15% so far in 2005, Schwab is trading near our 12-month target price of $10. At about 20 times our 2005 earnings per share estimate, we view this premium to peers as justified.

RF Micro Devices (RFMD ): Reiterates 3 STARS (hold)

Analyst: Zaineb Bokhari

RF Micro Devices widens its March-quarter operating loss guidance to 8 cents to 9 cents from 1 cent to 3 cents, before items. Results were hurt by lower gross margins, as the company increased inventory reserves and lowered the value of its inventory of older products. Higher research and development expenses for newer products also affected results. We are cutting our fiscal 2005 (ending March) estimate to a 2-cent loss from 5 cents earnings per share. Our fiscal 2006 revenue estimate also declines to $663 million from $683 million, and our earnings per share estimate falls to 10 cents from 13 cents. Our 12-month target price stays $6, based on a historical 2.0 times price-to-sales multiple on our fiscal 2006 estimate.

Genworth Financial (GNW ): Reiterates 4 STARS (buy)

Analyst: Gregory Simcik, CFA

Genworth Financial posted first-quarter operating earnings per share of 66 cents, vs. pro forma 50 cents, 8 cents above our estimate. Bond calls/prepayments, recoveries, and partnership income added 3 cents. However, results were hurt somewhat by more shares outstanding. We think strong mortgage insurance operations contributed to the earnings surprise, and better corporate segment results may also have helped. We will update after first-quarter earnings conference call scheduled Apr. 29. We are raising our 2005 operating earnings per share estimate to $2.52 from $2.44 on results, and our 12-month target price to $33 from $32 on a p-e of 13 times that estimate.

Mattel (MAT ): Reiterates 3 STARS (hold)

Analyst: Amy Glynn, CFA, Jason Asaeda

Shares are down about 7% this morning on first-quarter earnings per share of 2 cents, flat vs. a year ago and below our 6 cents estimate. The shortfall mostly reflects flat sales, against our forecast of a 3% rise, and a lower gross margin than we expected. After encouraging holiday sales and, in particular, a marked improvement in Barbie sales in the fourth quarter, we find the first quarter disappointing as Mattel continues its struggle to revitalize its fashion doll business. In our view, this remains the key issue plaguing Mattel's results. Excluding a $180 million tax liability expected for the second quarter, we are trimming our 2005 earnings per share estimate to $1.25 from $1.32.

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