S&P Keeps Strong Buy on Dell, Microsoft

Also: Opinions on AmeriTrade Holding, Delphi, and more

Dell Inc. (DELL ): Reiterates 5 STARS (strong buy)

Analyst: Megan Graham-Hackett

We believe Dell's 32% higher April-quarter EPS of 37 cents, vs. 28 cents one year earlier, in line with our estimate, indicates that the company's model has enabled it to grow above its peers, even in difficult market conditions. Revenues rose 16%, in line with our estimate, and we are pleased with growth in strategic areas such as services, printers, and international. Dell guided for stronger second-quarter revenue growth of 16% to 18% and EPS of 37 cents to 39 cents; the top end of the ranges are above our model. Our fiscal 2006 (ending January) EPS estimate rises by one cent to $1.59. With Dell below our discounted cash-flow-derived target price of $49, we view the shares as undervalued.

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

Analyst: Jonathan Rudy, CFA

Microsoft unveiled its next-generation hardware gaming console, X-Box 360, last night on MTV. This console has notably higher processing power than the original X-Box, which should result in more advanced graphics, and the capability of being seen in high definition. X-Box 360 also has more online capabilities and other entertainment features such as streaming pictures, music, and video. We anticipate that the console will be released before the holiday season begins in late November. We believe X-Box 360 will be a positive for Microsoft as it continues to diversify away from the PC.

AmeriTrade Holding (AMTD ): Reiterates 3 STARS (hold)

Analyst: Robert Hansen, CFA

AmeriTrade Holding posted average trades per day of 140,000 in April, down from 167,209 in the March-quarter. Margin balances eased, but look to us relatively stable by comparison. We think lower trading volumes were largely due to weak equity markets in April and an early summer slowdown. However, we see a rebound in trading activity in early fiscal 2006 (ending September) and view positively the fact that open accounts continue to trend higher. We are lowering our fiscal 2005 (ending September) earnings per share estimate to 78 cents from 80 cents. But, our target price remains $14, or 18 times our fiscal 2005 earnings per share estimate. We view AmeriTrade's valuation as appropriate.

Delphi (DPH ): Reiterates 3 STARS (hold)

Analyst: Efraim Levy, CFA

Delphi posted a first-quarter loss of 74 cents, vs. earnings per share of 9 cents. The divergence from our projected a 32-cent loss mainly reflects the company's inability to use about 40 cents in non-cash tax benefits. Delphi lowered its General Motors sales outlook and now expects to pay tax in 2005 despite operating losses. We are widening our 2005 loss estimate to $1.90 from 74 cents. On the positive side, we expect GM production to rise in 2006 and 2007, and we see as gains in non-GM sales. Our target price remains $5. With uncertainties and risks, we would not add to positions, despite the gap vs. our target price.

Tiffany & Co. (TIF ): Maintains 3 STARS (hold)

Analyst: Jason Asaeda

Tiffany & Co. posted April-quarter earnings per share of 27 cents, vs. 25 cents, 2 cemts ahead of our estimate. While gross margins were pressured by high product costs, expenses were leveraged on strong 11.6% sales gain driven by 14% growth in U.S. retail sales. We are increasing our fiscal 2006 (ending January) earnings per share estimate by 2 cents to $1.52, as we see select price increases, improving merchandise margins and Tiffany & Co.'s solid U.S. operations offering downside protection against potential weakness in Japan. We are raising our 12-month target price by $1 to $32, based on updated relative and discounted-cash-flow analyses.

Kohl's Corp. (KSS ): Reiterates 4 STARS (buy)

Analyst: Jason Asaeda

April-quarter earnings per share of 36 cents, vs. 32 cents misses our estimate by 2 cents. Selling, general, and administrative expenses were modestly higher than projected, reflecting costs related to Kohl's rollout of cosmetics to 300 additional stores in March. Since the company sees weather working against May sales, we are trimming our fiscal 2006 (ending January) earnings per share estimate by 4 cents to $2.46. But given favorable customer response to new apparel brands, and Kohl's ongoing efforts to flow merchandise receipts closer to when customers are looking to buy, our outlook for the company remains positive. We are reiterating our 12-month target price of $55.

Martek Biosciences (MATK ): Reiterates 4 STARS (buy)

Analyst: Markos Kaminis

We believe two news releases from Martek Biosciences support the case for the company's long-term growth potential. The Appeal Board of the European Patent Office overturns a 2000 decision of the Opposition Division of the Patent Office, returning the case to court and, at a minimum, effectively sustaining broad claims for the patent during litigation, a period Martek Biosciences sees at about four years. Also, a study on therapeutic effects of Martek Biosciences's DHA on cardiovascular health showed mixed results. We believe DHA retains its potential as a food additive. Our discounted-cash-flow-based target price remains $58.

Biomet (BMET ); Stryker (SYK ); Zimmer Holdings (ZMH ): Reiterates 3 STARS (hold)

Analyst: Robert Gold

S&P reiterates its neutral stance on orthopedic device stocks. We continue to expect companies in our orthopedic device coverage group will trade in a tight range, as concerns regarding lower unit pricing in 2006 join with valuations that remain high relative to the S&P 500 and the broader health care sector. While we think most of the publicly-owned hospital chains have not set plans to adopt "gain sharing" agreements to lower their orthopedic device costs, we believe prices will begin to flatten in 2006, restricting valuation expansion across the group. We have hold opinions on Zimmer, Biomet, and Stryker.

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