Still Hold HP

Analyst Megan Graham-Hackett is positive on the tech giant's plan to separate its PC and printer units. Plus: opinions on Charles Schwab, Best Buy, and others

Hewlett-Packard (HPQ ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

We view HP's announced separation of its PC and printer units -- just 5 months after forming the combined unit -- as a positive, potentially building more transparency into the businesses and improving profitability by enabling each unit to better focus on its distinct business model. Separately, the SEC has requested information on CEO Mark Hurd's sale of NCR Corp. (NCR ; 3 STARS) shares, based on public comments regarding the dates involved; we believe the review is routine. With HP shares trading at a price-to-sales ratio of 0.8 times, below the average of HP's industry peers, we view the stock as worth holding.

Charles Schwab (SCH ): Maintains 3 STARS (hold)

Analyst: Robert Hansen, CFA

Schwab posted higher revenue trades year over year, $3.9 billion in client inflows, and an 11% rise in client assets in May. We are impressed by the company's consistent net client inflows and see higher asset management fees in 2005 on a rebound we expect in equity markets. We think Schwab's lowered commission rates and cost and headcount reductions are helping it regain its competitive differentiation. We are leaving our 2005 earnings per share estimate at 50 cents but raising our 12-month target price to $12 from $11, or 24 times that estimate. We view this premium as appropriate and would hold Schwab shares.

Best Buy (BBY ): Reiterates 5 STARS (strong buy)

Analyst: Amy Glynn, CFA

Including a stock option expense in both periods and May-quarter earnings per share of 51 cents, vs. 28 cents beats our 30 cents estimate. In addition to a 5 cent benefit from a lower tax rate, key upside drivers were revenue growth and better-than-expected gross margins. Best Buy says a less promotional environment, supply chain benefits, growth in services, and contribution from segmented stores aided margins. We view results as a testament to Best Buy's operating strength and market leadership. fiscal 2006 (ending February) earnings per share guidance grows to $3.10 to $3.25 from $2.95 to $3.10. Our model is under review.

Western Digital (WDC ): Reiterates 3 STARS (hold)

Analyst: Richard Stice, CFA

Western Digital updates June-quarter guidance, now seeing revenue of $900 to $915 million, compared to prior estimates of $875 to $900 million. However, the company only reiterates earnings per share guidance of 22 cents to 24 cents, due in part to an unforeseen $3 million bad debt charge. We note that new product programs continue to progress as planned and pricing and inventory levels remain favorable. However, we believe these positive attributes are being adequately reflected in Western Digital's share price. As a result, we see further upside as limited and would not add to existing positions. Our 12-month target price is $17.

OfficeMax (OMX ): Maintains 3 STARS (hold)

Analyst: Gary McDaniel

The SEC is formally investigating OfficeMax following the company's internal investigation into its accounting for vendor income. In connection with the internal investigation, which ended in March 2005, six employees were fired and the company found that it had overstated net operating income for the first three quarters of 2004 by $4.3 million. While the SEC investigation is likely to carry headline risk for shareholders, we do not believe it will result in any additional material findings. We are maintaining our 12-month discounted cash flow-based target price of $32.

Knight Ridder (KRI ): Maintains 3 STARS (hold)

Analyst: Jonathan Peters, CFA

Knight Ridder posted May results today, with ad revenues up 3.5%, circulation revenues down 1.7%, and other revenues, consisting partly of Detroit Newspapers, falling a worse-than-expected 41.9%. The company also announces it will be booking severance costs for Detroit Newspapers in the second quarter. While we still expect revenue growth to improve in the latter half of the year, we are lowering our full 2005 revenue projections to reflect a slower growth trajectory. We are reducing our 2005 earnings per share estimate to $3.94 from $4.08. We are lowering our target price to $71 from $73, based on updated discounted-cash-flow analysis.

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