S&P Keeps Sell on Delta Air Lines

Analyst James Corridore also cut his price target for the carrier as another key finance exec departs. Also: opinions on Dell, EchoStar, MCI, and more

Delta Air Lines (DAL ): Reiterates 2 STARS (sell)

Analyst: James Corridore

Delta announces that it has replaced its treasurer with a former Delta assistant treasurer. Coming shortly after the company replaced its CFO, we think today's news could signal that the restructuring is not progressing well. We continue to think Delta is likely to file for Chapter 11 protection sometime in the next 6-12 months. Upcoming changes in bankrutpcy laws on Oct. 17 could prove to be a catalyst for a filing sooner rather than later. Our 12-month target price falls to $1.50 from $2.00.

Dell (DELL ): Reiterates 5 STARS (strong buy)

Analyst: Megan Graham-Hackett

We expect Dell to post July-quarter earnings per share of 38 cents when it reports after the market close on Thursday, Aug. 11. We estimate sales growth of 16% to $13.59 billion, and expect gross margins to hold around 18.5%. Key issues we will look for in the quarter include the pace of back-to-school season buying to date, corporate buying patterns (PCs, servers, storage) and competitive landscape comments on Hewlett-Packard and Lenovo, both in the U.S. and overseas. With shares trading below our discounted cash flow-derived 12-month target price of $49, we view Dell as undervalued.

MCI (MCIP ): Maintains 3 STARS (hold)

Analyst: Todd Rosenbluth

Update: Following MCI's second-quarter call to discuss results that exceeded our estimate because of nonoperating gains, we believe that the planned merger with Verizon Communications (VZ ) remains on track. We expect shareholder approval in September and see the deal closing in early 2006. In the second half of 2005, we believe revenues from MCI's valuable enteprise segment will remain relatively stable, but we see access cost-reduction efforts challenged by reduced traffic. Based on the terms of the Verizon deal, we would hold MCI shares, trading below our $27 12-month target price.

FuelCell Energy (FCEL ): Reiterates 4 STARS (buy)

Analyst: Royal Shepard

As expected, the new Energy Policy Act of 2005 creates a 30% investment tax credit for the purchase of fuel cell power plants. FuelCell Energy estimates that a 20%-25% cost reduction will pass directly through to purchasers of its Direct Fuel Cell plant. The bill also authorizes $3.7 billion in spending over the next five years for hydrogen and fuel-cell related research. We remain positive on FuelCell Energy's ability to develop a commercially viable product. Our 12-month target price of $11 is based on a blend of discounted cash flow and relative peer valuations.

Sprint (FON ) and Nextel Communications (NXTL ): Reiterates 4 STARS (buy)

Analyst: Ken Leon, CPA

Sprint and Nextel Communications say they intend to close their proposed merger on Aug. 12, with all required regulatory approvals for the merger complete. After the merger closes, Sprint Nextel common will begin trading on Aug. 15 on the NYSE as "S." We believe the new company will have a high growth profile, strong margins, and the best mix of business users in the U.S. wireless market. We would expect Sprint Nextel to aggressively market the new brands that they chose for the combined company. The long-term merger cost synergies seen by the companies are $12 billion.

Blockbuster (BBI ): Reiterates 3 STARS (hold)

Analyst: Amy Glynn, CFA

Second-quarter adjusted loss of 22 cents, vs. earnings per share of 27 cents, is wider than our 9 cents loss estimate. Major issues are weaker rentals than we expected and continued investments in late-fee elimination and online offerings. But traffic and subscriber trends indicate that initiatives are starting to gain traction, and we think the planned price hike for online service will also help. We think the benefits of initiatives will be more evident in 2006, though visibility is low. We are cutting our 2005 estimate to a 30 cents loss from 9 cents EPS, 2006's to 59 cents EPS from 71 cents EPS, and our 12-month target price by $2 to $8.

EchoStar Communications (DISH ): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

EchoStar reports second-quarter net adds of 225,000, sharply below our 314,000 estimate, as 10-Q filing points to higher churn but, we think, also reflects more competition. But before a $1.22 one-time tax benefit, earnings per share of 57 cents, vs. 18 cents, beat S&P and Street views by 18 cents and 13 cents. While average revenue per user and subscriber acquisition costs were in line with our forecast, we think less-than-expected increases in programming expenses and cost of equipment aided second-quarter operating leverage. The 10-Q alludes to further declines in co-branded subscribers with telco SBC (SBC ).

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