S&P Keeps Hold on Google

Plus: analysts' opinions on earnings updates from Microsoft, Broadcom, Tempur-Pedic, and more

Google (GOOG ): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Excluding stock-based compensation, Google posts second-quarter earnings per share of $1.36, vs. 58 cents, above our $1.08 forecast. Revenues rose 98%, besting our projection by some 6%, on what we view as strong results from Google and network websites. However, we see seasonality and a difficult comparison somewhat restraining growth in the third quarter. Nonetheless, we expect search advertising volumes and pricing to remain favorable; we are raising our 2005 EPS estimate to $5.53 from $4.76, and setting our 2006 forecast at $7.36. Our 12-month target price increases to $327 from $317, based on peer and discounted cash flow analyses.

Microsoft (MSFT ): Reiterates 5 STARS (strong buy)

Analyst: Jonathan Rudy, CFA

June-quarter operating earnings per share of 33 cents, vs. 28 cents, excluding equity compensation cost, legal charges, and tax benefits, was 2 cents better than our estimate. Revenues of $10.16 billion were slightly below our $10.22 billion estimate. We were impressed with Microsoft's Server/Tools segment, which grew 16% from a year ago, and the Home/Entertainment segment, which grew 22%. We are raising our fiscal year 2006 (June) operating EPS estimate to $1.45 from $1.44. With a number of new product cycles approaching, such as the 2006 Longhorn release, Office 12, SQL Server 2005, and X-Box 360, we would buy the shares at a discount to our discounted cash flow-derived 12-month target price of $33.

Broadcom (BRCM ): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Broadcom posts second-quarter pro-forma earnings per share of 34 cents, vs. 35 cents, well above our 26 cents estimate and 25 cents consensus forecast. Sales grew 10% sequentially, and gross margin widened by 160 basis points from the first quarter. We now see third-quarter sales up another 10% sequentially, reflecting broad-based demand strength, and a flat gross margin of 53.7%. On higher sales growth and lower tax rate assumptions, we are raising our third-quarter EPS estimate to 37 cents, from 28 cents; full year 2005 to $1.32, from $1.07; and 2006 to $1.47, from $1.15. Our 12-month target price rises to $48 from $38, based on our revised p-e and price-to-sales analyses.

Kimberly-Clark (KMB ): Maintains 3 STARS (hold)

Analyst: Howard Choe

Second-quarter earnings per share of 95 cents, vs. 87 cents, is 2 cents above our estimate. Sales growth of 8% was higher than we expected, but this is at the expense of profits, with selling, general, and administrative (SG&A) costs up 12% and operating profit up just 2%. Given Kimberly-Clark's continuing profit struggles, we are not surprised by its plans to lower costs by closing 20 plants and reducing staff by 10%. We are raising our 2005 EPS estimate to $3.82 from $3.80. We are maintaining our 12-month target price at $70, which assumes a forward p-e of 17. We believe new products, cost cuts, and share buybacks will support market-like performance.

Schlumberger (SLB ): Reiterates 4 STARS (buy)

Analyst: Stewart Glickman

Second-quarter earnings per share of 78 cents, vs. 43 cents, is 9 cents above our estimate, benefiting from higher volumes and pricing in oilfield services. We think oilfield services margins in the first half, in the area of 20%, are sustainable. We are raising our 2005 EPS estimate from continuing operations to $3.06 from $2.82, 2006's to $3.65 from $3.39. Schlumberger, which typically trades at a premium to peers, is now at 12.6 times our 2006 EBITDA estimate, against peers' 10.6. Even so, our discounted cash flow model, using free cash flow growth of 7%, shows Schlumberger as undervalued. Blending metrics, we are raising our target price by $5 to $91.

Tempur-Pedic (TPX ): Maintains 4 STARS (buy)

Analyst: Amy Glynn-CFA

The shares are down more than 20% today following Tempur-Pedic's report of second-quarter revenue below S&P and Street expectations, as well as its launch of a lower-priced mattress that we believe raises concerns about potential cannibalization of existing premium-priced products. Even so, we still expect full 2005 sales growth to be robust, but now expect 29% growth, down from 31%. We think today's stock price drop is an overreaction. Tempur-Pedic still looks attractive to us at 13 times our 2006 estimate of $1.38, though we are cutting our 12-month target price by $4, to $29, projecting a smaller p-e expansion.

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