S&P Downgrades HCA to Hold

Plus: analysts' opinions on Sirius Satellite Radio, Countrywide, and more

HCA Inc. (HCA ): Downgrading to 3 STARS (hold) from 5 STARS (strong buy)

Analyst: Cameron Lavey

HCA sees second-quarter earnings per share of 88 cents to 92 cents, compared with our 80 cents estimate. However, projected results include four one-time items which will boost EPS by 16 cents. On a same-facility basis, admissions slipped 0.3% and adjusted admissions rose 1.2%. Bad debt expense of 11.6% is up from year-ago 11.3%. We are concerned by admissions and bad debt, and a 5% rise in uninsured admissions. We are reducing our 2005 EPS estimate by 15 cents, to $3.15, but still see 2006 at $3.45 after 15 cents in option expense. We are cutting our 12-month target price by $15 to $55, about 17 times our 2005 estimate, in line with peers.

Sirius Satellite Radio (SIRI ): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

An unconfirmed NY Post report says Sirius is mulling a bid for the radio assets of Walt Disney (DIS ). While we view Disney's radio assets as among the best in class, we think such an unlikely deal would significantly dilute Sirius' long-term growth profile. And it is not clear to us that compelling synergies would arise from relatively incompatible satellite and terrestrial models. While Sirius has over $600 million in its growing cash reserves, a deal we see at likely $2.5 billion to $3.0 billion in magnitude would strain its balance sheet, in our view, and potentially delay anticipated attainment of positive free cash.

Oneok (OKE ): Upgrading to 5 STARS (strong buy) from 4 STARS (buy)

Analyst: Yogeesh Wagle

Despite growing mergers and acquitions in the utilities sector, we think Oneok's share price does not fully reflect the underlying value of its natural gas and natural gas liquids assets. Based on a sum-of-the-parts methodology, assuming peer-average enterprise value/EBITDA multiples for Oneok's upstream, midstream, and utility businesses, we are raising our 12-month target price by $4, to $42. This implies a p-e of 17.7 times our $2.37 2005 EPS estimate, in line with peer group average. With a dividend yield at 3.3%, we have a strong buy opinion on Oneok, based on total return potential.

Office Depot (ODP ): Downgrading to 2 STARS (sell) from 3 STARS (hold)

Analyst: Michael Souers

We are downgrading our recommendation ahead of the second-quarter earnings release, based on valuation. Office Depot shares are up about 35% so far in 2005, and appear to be pricing in a more rapid turnaround for the company than we view as feasible. While new CEO Steve Odland is well known for his cost-cutting ability, and share repurchases will help, the company is still facing what we regard as considerable challenges, including weak economic conditions in Europe. We are lowering our 2005 EPS estimate to $1.26 from $1.28, but are maintaining 2006's at $1.46. Our discounted cash flow-based target price remains $21.

Countrywide Financial (CFC ): Upgrading to 4 STARS (buy) from 3 STARS (hold)

Analyst: Jason Seo, CFA

We see Countrywide benefitting as recent data suggests robust levels of home sales and mortgage origination volumes continue amid historically low long-term interest rates. In addition, we see the lender's earnings volatility decreasing somewhat because of growing earnings contributions from its non-mortgage-banking segments. We are increasing our 12-month target price by $4, to $45, or to 10.8 times our 2005 operating earnings per share estimate of $4.17, a premium to peer mortgage lenders that reflects our positive view of Countrywide's market-leading position in originations.

Harley-Davidson (HDI ): Keep 3 STARS (hold)

Analyst: Tom Graves, CFA

Second-quarter earnings per share of 84 cents, vs. 83 cents, tops our estimate by 6 cents, helped by more stock buybacks than we expected. We are raising our 2005 EPS estimate to $3.37 from $3.25, and 2006's to $3.75 from $3.60. Harley-Davidson shares are now at a modest p-e discount to the S&P 500. We believe this will narrow as investors focus on strong brand and market leadership, plus expectations of favorable cash flow. Combined with our discounted cash flow model, which includes an 11% weighted average cost of capital and average 8% annual free cash flow growth over the next 15 years, this leads us to raise our 12-month target price by $4 to $60.