S&P Keeps Buy on Disney

A spinoff of Disney's radio business seems plausible. Plus: analysts' opinions on PepsiCo, Alltel, NCR, and more

Walt Disney (DIS ): Reiterates 4 STARS (buy)

Analyst: Tuna Amobi, CPA, CFA

An unconfirmed Wall Street Journal report says Disney is mulling a multi-step plan for a radio spinoff, possibly entailing segment combination with another radio company, and Disney holders owning at least 50%. While Disney's radio assets are outperforming peers, in our view, we see more chances of spin (or sale) under new CEO Iger. But with our view of a relatively modest Disney dividend yield and unlikelihood of a major acquisition, we are skeptical of optimal reinvestment of the $2.5 billion to $3.5 billion potential proceeds from its radio network and 71 stations. For this reason, a proposed spinoff seems more plausible to us than outright sale.

PepsiCo (PEP ): Maintains 5 STARS (strong buy)

Analyst: Richard Joy

Second-quarter earnings per share of 70 cents, vs. 61 cents, is 3 cents above our estimate. We are impressed by second-quarter operating profit up 10%, with Quaker Foods North America up 24%, PepsiCo International up 23%, Frito-Lay North America up 6%, and PepsiCo Beverages up 4%. We expect brand momentum to continue on new products and marketing spending for North American beverages. While fuel costs are a challenge, we expect some easing for PepsiCo's input costs in the second half. We are raising 2005 estimate by 2 cents to $2.62. We think strong cash flow and EPS visibility make PepsiCo attractive and our 12-month target price remains $65.

TD Banknorth (BNK ) and Hudson United Bancorp (HU ): Reiterates 3 STARS (hold)

Analyst: Christopher Muir

TD Banknorth agrees to acquire Hudson United for about $1.9 billion in stock and cash, and expects closing in the first quarter of 2006, subject to needed approvals. We view the planned acquisition as favorable, giving TD Banknorth a significantly larger footprint in the Northeast. But we see limited merger savings. We also note that the cash portion of the deal will be financed through a sale of stock to TD Banknorth's controlling shareholder TD Bank Financial at $31.79 per share. We are lowering our 12-month target price for TD Banknorth by $2, to $30, based on our dividend discount model and relative value analysis. We are raising our 12-month target price for Hudson United by $7 to $43 based on the terms of the merger agreement.

Ameritrade (AMTD ): Reiterates 2 STARS (sell)

Analyst: Robert Hansen, CFA

June-quarter earnings per share of 18 cents, vs. 15 cents, is above our 17 cents estimate. We are impressed by these results amid lower trading volumes and reduced pricing. We are raising our fiscal year 2005 (September) EPS estimate to 77 cents, from 75 cents, on higher interest income and reduced operating expenses, though we project lower trading volumes. We are raising our target price to $17 from $16, or to 22 times that estimate. We view favorably the higher mix of interest revenue. But, we think price competition remains intense and see market-share gains as difficult. Following the recent price rise, our opinion remains sell.

Alltel (AT ) and Western Wireless (WWCA ): Downgrading to 2 STARS (sell) from 3 STARS (hold)

Analyst: Todd Rosenbluth

With FCC consent, Alltel is closer to completing its pending merger with Western Wireless in the third quarter. While we note Alltel's previous success in integrating acquisitions and its strong dividend history, we believe Western Wireless' operations will result in challenges for the combined rural carrier that are not reflected in the share price, including lower revenue per user and weak overseas operations. We estimate that on a pro forma basis, Alltel trades at p-e of 18 and a ratio of enterprise value to EBITDA of 7.7, above peers. Above our 12-month target price of $60, we would sell Alltel. Based on terms of proposed deal and our target price for Alltel of $60, we are raising our target price on Western Wireless by $2 to $41. With Western Wireless shares trading above our target, our opinion is sell.

NCR Corp. (NCR ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

NCR sees earnings per share upside of 4 cents to the high end of second-quarter guidance, or 34 cents compared with 28 cents we expect. However, we note that it sees revenues up 1%, compared with our 3.6% growth forecast. As with Diebold (DBD ), NCR's ATM business fell short of its expectations. We believe the stronger-than-expected profit it now sees in Teradata and Customer Service reflects conservative guidance. We will monitor the ATM business to see if the slowdown is protracted, but for now, we are keeping our 2005 estimate at $1.40. At 1.1 times price/sales, near the peer average, we view NCR as fairly valued.

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