S&P Keeps Hold on Sun, Cuts StorageTek

Plus analysts' opinions on Biogen Idec, eBay, and more

Sun Microsystems (SUNW ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Sun announces plans to acquire Storage Technologies for $4.1 billion in cash ($3 billion net), pending needed approvals. We view the planned deal positively. We see Sun benefiting from StorageTek's sales force; if product execution goes well, it could differentiate around end-to-end security management. Sun sees the deal as accretive to non-GAAP earnings per share within 12 months of close. No change to our estimates, but we view how well Sun maintains StorageTek's strong cash flow and gross margin as key. The new entity should have cash/investments of $4.5 billion. At price/sales of 1.1 times, in line with peers, we would hold.

Storage Technology (STK ): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Richard Stice, CFA

StorageTek agrees to be acquired by Sun Microsystems for $37 per share in cash, a total of about $4.1 billion. The deal represents an 18% premium to StorageTek's June 1 closing price. The proposed transaction is expected to close, subject to regulatory and shareholder approval, in the late summer/early fall. We think StorageTek has been an attractive acquisition candidate for some time, given what we see as favorable industry position and capital structure. We are raising our 12-month target price by $2 to $37, given our belief that the deal is likely to be consummated.

Biogen Idec (BIIB ): Maintains 3 STARS (hold)

Analyst: Frank DiLorenzo, CFA

The Boston Globe reports the possibility that a fourth patient taking Tysabri may have developed progressive multifocal leukoencephalopathy, a rare neurodegenerative disease. We continue to think that Tysabri will not come back onto the market and believe this new case strengthens that scenario. We see solid value in Rituxan and Avonex, but consider Biogen's pipeline to be below average in relation to its market cap. We are lowering our 2005 earnings per share estimate to $1.40 from $1.55. Assuming Biogen trades at 1.6 times our 2006 earnings per share estimate of $1.69, our 12-month target price remains $39.

EBay (EBAY ): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

EBay announces the proposed acquisition of Shopping.com, a provider of online comparison-shopping services, for some $620 million. Since last year the company has been adding, through acquisition and internal development, non-eBay listings services. We believe eBay sellers would increasingly employ Shopping.com's offerings to pursue sales, and that Shopping.com merchants could be targeted for potential new or additional eBay business. However, we see this deal, which we expect to close by September 2005, pending approvals, as a sign of the maturing of some of eBay's core areas.

Continental Airlines (CAL ): Reiterates 5 STARS (strong buy)

Analysts: Jim Corridore, Stewart Scharf

Shares are up 7% so far today as Continental estimates its May revenue per available seat mile rose 8.5% to 9.5% from a year ago on improving load factor at 79.1%, up 4.7% from a year ago, and on domestic fare hikes. A 10.8% rise in traffic outpaced a 4.2% increase in capacity. This supports our view that the overall revenue environment is improving. Continental has taken actions to manage the trend of customer bookings closer to flight dates, and we think the company is well positioned to benefit from labor cost cuts. We are raising our 12-month target price by $1, to $17.

Federated Department Stores (FD ): Reiterates 3 STARS (hold)

Analyst: Jason Asaeda

Federated agrees to sell its $3.2 billion credit portfolio to Citigroup, subject to needed approvals. After its planned acquisition of May Department Stores, Federated also plans to sell May's $2.2 billion credit portfolio to Citigroup. We are positive on this news as we see Federated using $4.5 billion in total after-tax proceeds to fund the May deal and to buy back stock. We see business as usual near term, but with Federated not expensing options until fiscal 2007 (ending January), we are lifting our fiscal 2006 earnings per share estimate by 9 cents to $4.90. We are raising our target price by $2 to $70 on updated discounted-cash-flow and p-e-growth models.

Eastman Chemical (EMN ): Reiterates 3 STARS (hold)

Analyst: Richard O'Reilly, CFA

We are raising our 2005 earnings per share estimate to $6.00 from $4.20 to reflect stronger trends than we had expected. We see second-quarter operating earnings per share at $1.80, vs. 82 cents, off only slightly from the first-quarter's above-expected $1.92. There will likely be a one-time charge related to the repurchase of $500 million of debt through a self tender, for which Eastman plans to use $420 million of proceeds from the recent sale of a 42% interest in a biotech company. Polyester resin prices may now trend down, following raw material costs. We are raising our 12-month target price to $64 from $62 to reflect our improved earnings per share outlook.

Marriott International (MAR ): Maintains 3 STARS (hold)

Analyst: Thomas Graves, CFA

Marriott's forecast of 17% to 22% annual earnings growth through 2008 is in line with our outlook. This excludes contributions from a synthetic fuel investment, which we view as lower-quality earnings per share likely to end no later than 2007. Including 44 cents annual synfuel contributions, we are keeping our 2005 earnings per share estimate at $2.90 (including 11 cents of costs related to incentives for a new bedding program) and our 2006 estimate at $3.40 (including 7 cents of projected option expense). We expect favorable longer-term earnings per share outlook to support higher stock valuation, and our target price rises to $72 from $67.

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