S&P Keeps Hold on Amazon.com
Amazon.com (AMZN ): Reiterates 3 STARS (hold)
Analyst: Jason Asaeda
Amazon.com posted first-quarter operating earnings per share of 12 cents, vs. 26 cents, 7 cents below our estimate. Sales rose 24%, ahead of our 20% projection, but operating margin narrowed 150 basis points on free shipping costs and heavy spending on technology/content development. Transfer of assets from the U.S. to international locations also resulted in $56 million tax expense. While we are raising our full 2005 sales projection to $8.5 billion from $8.3 billion, we are cutting our operating earnings per share estimate by 10 cents to 78 cents, on margin contraction we expect. Based on updated discounted-cash-flow analysis, we are lowering our target price by $5 to $33.
Verizon Communications (VZ ): Maintains 4 STARS (buy)
Analyst: Todd Rosenbluth
Following Verizon's conference call to discuss first-quarter operating earnings per share of 63 cents, which was slightly below our estimate, we continue to believe Verizon has strong fundamentals and remain encouraged by demand for Verizon's wireless services, as customer additions and churn remain better than peers. In our view, EBITDA margins will remain wide and we view positively Verizon's capital spending efforts. Verizon trades at a p-e discount to peers, which, in our view, is likely due to concern about its pending merger with MCI, which is being challenged. We expect Verizon to provide clarity on this issue by end of the week.
Colgate-Palmolive (CL ): Reiterates 5 STARS (strong buy)
Analyst: Howard Choe
Colgate posted first-quarter earnings per share of 61 cents, vs. 59 cents, a penny higher than our estimate but in line with the Street. Total sales growth of 9% was stronger than we had expected. Higher marketing investment continues to drive volume growth (7.5% growth and ex-divestments) and market shares. We believe Colgate is executing on plan, gaining market share while focusing on cost reduction. We see a healthy product pipeline and the emergence of restructuring savings in the second half as catalysts for Colgate. We view shares as attractively valued at a modest discount to Colgate's peers and well below our $62 target price.
Juniper Networks (JNPR ): Reiterates 3 STARS (hold)
Analyst: Ari Bensinger
Juniper Networks agrees to acquire Peribit Networks, a WAN optimization provider, for $337 million, and Redline Networks, a developer of front end applications solutions, for $132 million. Subject to necessary approvals, the Peribit deal is expected to close in third-quarter 2005, Redline in second-quarter 2005. We believe these deals will allow Juniper to penetrate fast-growing traffic processing optimization arena. The ability to offer traffic management applications will become a critical customer requirement, creating a significant value-add that can differentiate Juniper's networking transport products from peers, in our view.
Circuit City (CC ): Maintains 3 STARS (hold)
Analyst: Amy Glynn, CFA
In response to a court ruling that recognizes the termination of the license agreement between Circuit City subsidiary InterTAN and RadioShack as of Dec. 31, 2004, Circuit City will rebrand all licensed RadioShack stores as "The Source by Circuit City" by June 30, 2005. Circuit City operates more than 900 of these stores throughout Canada. We expect to see the rebrand supported by a major advertising campaign. Having had lead time to prepare for this outcome, we believe that Circuit City has a solid plan in place and don't foresee a disruption in operations. Our target price stays $17.
IAC/InterActiveCorp (IACI ): Reiterates 3 STARS (hold)
Analyst: Scott Kessler
Private company G2 SwitchWorks says seven airlines agreed to use its alternative-GDS (global distribution system) services, and five of the airlines prepaid distribution fees for millions of tickets and will be able to obtain minority stakes in G2. We see GNEs (GDS new entrants) like G2 taking market share from GDS owners like Sabre Holdings. We also think they will enable travel suppliers and current and would-be intermediaries to potentially take share from leading online travel agencies owned by IAC/InterActiveCorp and priceline.com.
RealNetworks Inc. (RNWK ): Reiterates 3 STARS (hold)
Analyst: Scott Kessler
RealNetworks yesterday announced new music offerings. Rhapsody 25 allows users to listen to 25 songs a month, free of charge. Rhapsody Unlimited allows users to listen to an unlimited number of songs for the duration of their subscriptions, for $9.99 a month. Rhapsody To Go costs $14.99 a month and enables unlimited music downloads. We think these offerings will enable RealNetworks to gain market share in the online music market in terms of both subscriptions and downloads. However, related costs and expenses could be material. Our discounted-cash-flow-based 12-month target price remains $7.00.
Gilead Sciences (GILD ): Maintains 4 STARS (buy)
Analyst: Frank DiLorenzo, CFA
Gilead announces it will evaluate a second formulation of the triple combo pill consisting of its Truvada (Viread/Emtriva) anti-HIV drug and Sustiva from Bristol-Myers. The first formulation did not result in high enough levels of Sustiva. Gilead still sees the potential for year-end 2005 filing of new formulation, but we look for first-quarter 2006 filing. While a slight disappointment, we expect strong momentum for Truvada in 2005, partly on EU launches. We are maintaining our 2005 earnings per share estimate at $1.37 and 2006's at $1.55. On discounted-cash-flow analysis, our 12-month target price remains $44.