S&P Keeps Hold On EDS

Plus analysts' opinions on Apple Computer, L-3 Communications, and more

Electronic Data Systems (EDS ): Reiterates 3 STARS (hold)

Analyst: Stephanie Crane

EDS says it may write down the value of another customer contract, currently unidentified. According to EDS, the contract represents about $126 million in assets and software, with deferred costs of $40 million, all of which we think may be written off. The exact amount of the charge has not been determined, but the amounts involved suggest it could be enough to impact second-quarter and 2005 earnings per share, which we estimate at 11 and 50. Nonetheless, we still see recent efforts to reduce net debt and increase cash flow as positive. Our target price remains $22, based on our discounted-cash-flow and relative p-e-to-growth.

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

Analyst: Megan Graham-Hackett

An unconfirmed report in the Wall Street Journal states that Apple has reached a settlement in the class action lawsuit involving iPod batteries. The Journal states that the settlement may involve as many as 2 million iPods sold before May 31, 2004. Apple will replace some and give owners of others up to $50 in cash or credit on Apple purchases. Although Apple hasn't given an official statement, we would view positively the resolution of this longstanding issue. Shares trade above peers on enterprise value/sales basis, but with Apple's strength in design and iPod momentum, we would hold.

L-3 Communications (LLL ): Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: Robert Friedman, CPA

L-3 agrees to acquire spy equipment maker Titan Corp. for $2 billion in cash, about 13 times 2004 EBIT. We believe the transaction, subject to needed approvals, should materially boost L-3's sustainable earnings per share growth and return-on-equity. We think Titan's array of intelligence systems would expand L-3's presence in such growing markets as homeland security and Pentagon operations & maintenance. As a result, we expect growth markets and cost cuts to allow L-3 to post sustainable 7% to 9% growth rates in free cash flow and 12% to 15% return-on-equity. We are raising our free-cash-flow-based 12-month target price to $85 from $75.

Take-Two Interactive Software (TTWO ): Reiterates 3 STARS (hold)

Analyst: Jonathan Rudy, CFA

The company's April-quarter loss per share of 12 cents, vs. 22 cents is 2 cents narrower than our estimate. Revenue of $222 million exceeded our projection of $207 million. Sales were driven by Midnight Club 3 DUB Edition, Major League Baseball 2K5, and Grand Theft Auto San Andreas. We are raising our fiscal 2005 (ending October) earnings per share estimate to $1.44 from $1.41, and see $1.50 in fiscal 2006. With about $3.00/share in cash/investments, no debt, and trading at a discount to peers on enterprise value/sales, we would hold Take-Two despite our view of its inconsistent execution. We are raising our target price by $1 to $28 on relative valuation.

CNET Networks (CNET ): Reiterates 1 STAR (strong sell)

Analyst: Scott Kessler

Yesterday CNET's TV.com website debuted, following the company's Jan. 2005 acquisition of TVTome for $5 million and previous comments about the launch of a new offering. TV.com is a content and community website focused on current and past television shows, and is intended to enable CNET to better attract advertisers outside the technology industry. We believe TV.com has some appeal. However, we think the timing of its introduction, after the conclusion of television sweeps and when online activity is seasonally weak, is questionable. Our 12-month target price remains $7.50.

Cognos (COGN ): Maintains 5 STARS (strong buy)

Analyst: Zaineb Bokhari

Cognos announces preliminary May-quarter revenues of $198 million to $200 million, below the $203 million we had projected, and earnings per share of 21 cents to 23 cents, below our 26 cents estimate. Fewer large deals closed, which we attribute to weak sales execution, particularly in U.S., and to some impact likely from upcoming launch of Cognos 8. We are lowering our estimates for fiscal 2006 (ending February) revenue to $929 million from $944 million and earnings per share to $1.47 from $1.64. We see Cognos as a solid company, but in light of the May-quarter miss, we expect it to trade in line with peers. Our 12-month target price, based on relative valuation, falls to $42 from $52.

Exelixis (EXEL ): Maintains 3 STARS (hold)

Analyst: Jeffrey Loo, CFA

Exelixis announces a collaboration with Genentech to develop therapeutics for cancer, inflammatory diseases, and tissue growth and repair. It will receive an undisclosed upfront payment and research and development funding over three years. We are encouraged by this development, since it enables Exelixis to expand beyond small molecule development and into antibody development. We also see the company increasing its efforts to enter into more partnerships as it focuses solely on drug development after ending its agricultural and crop protection efforts. Our 12-month target price remains $9.

RealNetworks (RNWK ): Reiterates 4 STARS (buy)

Analyst: Scott Kessler

We are encouraged after RealNetwork's analyst meeting yesterday. The company emphasized its significant opportunities in digital media, its leadership in and focus on music, games and video, and its competitive advantages and successes. RealNetwork said the mid-May introduction of Yahoo! Music Unlimited at promotional prices hadn't impacted subscriber growth or churn rates of its offerings. Although we see competition in the music area increasing in the coming weeks and months, we believe RealNetwork is well positioned in that segment, and undervalued overall. Our 12-month target price remains $8.

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