S&P Keeps Hold on Viacom

Verizon stays at buy and SBC stays at hold after new FCC ruling, plus analysts' opinions on Network Appliance and more

Viacom (VIA.B ): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

Update: We think the coming months will be crucial for Viacom, which plans to file SEC form S4 by the end of September, pursuant to separation into two companies by the first quarter of 2006. Disparate profiles for new Viacom and CBS Corp. support our sum-of-the-parts target price of $36; $23 calculated for new Viacom and $13 for new CBS. But it is not entirely clear to us that outlined capital structure targets would allow each entity to ultimately fulfill its stated mission and deliver optimal shareholder returns. Aside from the spinoff, we see near-term uncertainties in local ad businesses.

Verizon Communications (VZ ): Maintains 4 STARS (buy)

SBC Communications (SBC ): Maintains 3 STARS (hold)

Analyst: Todd Rosenbluth

As expected, the FCC votes that wireline DSL service providers such as Baby Bells SBC and Verizon will soon no longer need to offer DSL access to competitors at regulated rates. We think this ruling will put the regulation of the Baby Bells' faster-growing broadband service more on par with that of cable companies. However, we do not believe it will materially alter the Bells' aggressive broadband pricing strategy nor change their capital spending efforts. We believe we are still in the early innings of the cable/telecom battle for consumer wallet share.

Alvarion (ALVR ): Reiterates 4 STARS (buy)

Analyst: Ari Bensinger

Similar to recent court rulings for cable-modem services, the FCC today reclassified digital service lines (DSL) as an information service, removing heavy federal regulations previously placed on the telecom operators. With the new ruling, telecom operators will no longer need to share their networks with Internet Service Providers (ISPs). We view the decision as positive for Wi-MAX vendors ALVR and Airspan (AIRN ), since it essentially forces ISPs to look more closely at alternative broadband transport offerings, such as Wi-MAX wireless access technology.

Audible (ADBL ): Reiterates 5 STARS (strong buy)

Analyst: Scott Kessler

Shares are down 14% today, following release of second-quarter results yesterday after close. We think the sell-off is an extreme overreaction, and regard the pullback as an enhanced buying opportunity. Increasing spending on new initiatives and IT infrastructure constitutes modest near-term negative, in our view. But, these investments are being made to prepare for significant future growth, which we expect to accrue beginning in 2006, when we forecast revenues will surge 75% and EPS will more than quadruple. Audible now has 2006 p-e-to-growth of 0.93, which we consider a compelling value.

Network Appliance (NTAP ): Reiterates 3 STARS (hold)

Analyst: Richard Stice, CFA

Network Appliance lowers guidance for July-quarter revenue to $446-$449 million and for operating EPS to 15-16 cents, compared with our estimated $473 million and 18 cents. The company cites product transition related to its new mid-range series. Our fiscal year 2006 (April) EPS estimate falls by 4 cents to 75 cents. We are cutting our 12-month target price to $27 from $31, based on discounted cash flow growth assumptions combined with a relative p-e-to-growth ratio. We are disappointed by the news, but given what we see as a favorable market position and our positive near-term outlook for the storage industry, we recommend hold.

Affiliated Computer Services (ACS ): Reiterates 3 STARS (hold)

Analyst: Stephanie Crane

June-quarter earnings per share of 87 cents, vs. 68 cents, is in line with our estimate. Revenue grew 14% on contracts of $216 million. For fiscal year 2006 (June), we look for revenue growth in high single digits, and new business signings of approximately $1 billion, about $200 million to $250 million per quarter. We would be concerned by top-line growth only in low single digits or by new business signings under $150 million per quarter. We project strength across all vertical markets and estimate fiscal year 2006 EPS at $3.30. We keep our 12-month target price at $52 on a peer-based p-e of 15.8 times that estimate.

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