S&P: Still Hold Apple

Amid the launch of the iTunes Podcast store, analyst Megan Graham-Hackett says the shares remain fairly valued. Plus opinions on IBM, Citigroup, and more

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

Analyst: Megan Graham-Hackett

In a largely expected move, Apple announces the availability of Podcasting with its release of iTunes 4.9. The new Podcast directory in iTunes lists 3,000 available Podcasts. We view this as an obvious area in which Apple will participate. The company also said it would merge its iPod and iPod photo lines, in order to offer the 20GB and 60GB iPods that include color screens and the new Podcast menu. We continue to see Apple shares, trading above peers on enterprise value/sales and p-e bases, as fairly valued given our view of the company's strong balance sheet and iPod's momentum.

International Business Machines (IBM ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

IBM announces it is complying with the SEC's informal investigation into its disclosures of stock option expensing in the first quarter. IBM's first quarter earnings per share had fallen short of our estimate by 7 cents, but the hit from stock options was 4 cents less than what the company had guided on Apr. 5, 2005. The exact focus of the SEC's inquiry has not been disclosed, but we note IBM has made strides over the past two years toward increasing transparency of its financial reporting. We do not expect a lengthy investigation and, at a below peer average of 13.4 times our 2006 earnings per share estimate, we view IBM as fairly valued.

Citigroup (C ): Reiterates 5 STARS (strong buy)

Analyst: Mark Hebeka, CFA

Citigroup today confirmed that it would pay 4 million pounds ($7.29 million) to the UK Financial Services Authority (FSA), relating to trading activity in the European government bond and bond derivative markets in Aug. 2004. The company would also relinquish about 9.96 million pounds ($18.15 million) in profits generated from the trades. We are impressed with the speed in which Citigroup and the FSA were able to resolve this issue and we believe the company has taken the appropriate steps to improve controls in its European trading operations. Our 12-month target price remains $57.

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

Analyst: Megan Graham-Hackett

Adding to a string of recent acquisitions, Sun Microsystems announces it plans to buy SeeBeyond Technology for $4.25 per share in cash, a total of $387 million, pending approvals. The deal values SeeBeyond at 2.3 times sales, which we view as reasonable, given valuation levels of peers. While Sun has a healthy cash balance, we note that the company's recent acquisitions have not included Sun stock. However, we do believe SeeBeyond's enterprise integration assets could be a plus to Sun's current portfolio.

Sun expects the acquisition of SeeBeyond Technology, seen closing this fall subject to approvals, to be slightly dilutive to non-GAAP earnings per share in its first 12 months. With many details not yet available, we are making no change to our estimates. We view this planned acquisition as potentially providing customers with a broader portfolio that better supports interoperability, but believe recent acquistions require Sun to restructure to better integrate the new components. Still, at a price/sales of 1 time, within range of peers, we view Sun shares as fairly valued.

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