S&P Keeps Strong Buy on Dell

Analyst Megan Graham-Hackett says the PC maker's gross margins were ahead of her model. Plus, opinions on Weight Watchers, Wal-Mart, and more

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

Analyst: Megan Graham-Hackett

July-quarter earnings per share of 38 cents, vs. 31 cents, met our estimate, but aggressive pricing in desktops caused revenues, up 15%, to be 1.2% shy of our model. While sales fell short on a weak consumer mix and slower demand from the federal government, strength in key areas such as services and storage buoyed gross margin to 18.6%, 10 basis points above our model. Thus, while Dell sees October-quarter revenues of $14.1-$14.5 billion, compared with the $14.5 billion we had projected, its EPS guidance was in line with our 40 cents estimate. Our fiscal year 2006 (January) estimate remains at $1.59, and our discounted cash flow-derived 12-month target price stays $49.

Weight Watchers International (WTW ): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Howard Choe

Our downgrade is largely based on valuation. Second-quarter earnings per share of 58 cents, vs. 46 cents, is 5 cents above our estimate. However, most of the upside came from a non-operating item. Although overall results were healthy, we view Weight Watchers' performance in the U.K. (22% of its attendance) as weak and likely to worsen in the near term. Reflecting this pocket of weakness, we are raising our 2005 EPS estimate by just 3 cents, to $1.95, and our 12-month target price by $1 to $57. Given U.K. results, and with its shares recently trading at a 30% premium to the S&P 500 on p-e-to-growth, we now see Weight Watchers as a market performer.

Clear Channel Communications (CCU ): Upgrades to 3 STARS (hold) from 1 STAR (strong sell)

Analyst: Tuna Amobi, CPA, CFA

While we still have questions on near-term financial efficacy of Less-Is-More radio campaign, we think Clear Channel could now trade ahead of a likely 2005 breakup. After reviewing SEC registration statements, we calculate reasonable Outdoor IPO multiple of about 10.2 (implied $6.50 per CCU share), and think the stand-alone entertainment CCE Spinco could fetch an exchange ratio of $1.25-$1.50 per CCU share. But filings do not fully resolve capital structure and governance issues we see. Still, with a likely sustained stock buyback, our sum-of-parts target price rises $8 to $36; the dividend yield is 2.2%.

Wal-Mart Stores (WMT ): Reiterates 5 STARS (strong buy)

Analyst: Joseph Agnese

We expect Wal-Mart to report July-quarter earnings per share on Tuesday, Aug. 16. We estimate EPS of 65 cents, vs. 62 cents, on improving sales trends and savings from global sourcing initiatives. Gross margin should benefit, we believe, from favorable weather that resulted in good sell-through of seasonal merchandise and reduced markdowns of inventory. However, we think the benefits will be partly offset by increased labor and health care costs, as well as rising energy expenses. We are maintaining our fiscal year 2006 (January) EPS estimate of $2.65, and our 12-month target price of $59 based on discounted cash flow and p-e analyses.

Red Robin Gourmet Burgers (RRGB ): Maintains 4 STARS (buy)

Analyst: William Mack, CFA

Second-quarter earnings per share of 45 cents, vs. 35 cents, matches our estimate, as operating margin gains offset company-owned same-store sales that rose 4.8% but fell short of our 6.0% estimate. We still look for operating EPS of $1.90 in 2005, though we are trimming our Core EPS projection to $1.75 from $1.85, reflecting accelerated option expense arising from an internal investigation announced earlier. To reflect the greater strategic uncertainty we now see, we are lowering our 12-month target price to $57 from $70, based on a discounted 25 p-e on our 2006 estimate, which we have cut to $2.25 from $2.35.

Cree (CREE ): Maintains 5 STARS (strong buy)

Analyst: Mark Basham

June-quarter earnings per share of 27 cents, vs. 28 cents, reflects 2 cents net charge for closure costs at California facility that were larger than we expected, offset by tax adjustments. Our estimate was 28 cents. Cree expects expenses to continue through the December-quarter for California operations, and we are cutting our fiscal year 2006 (June) estimate to $1.35 from $1.45. Importantly, we think Cree continues to invest in capacity expansion, 3-inch wafer platform, and new technologies to pursue several billion-dollar-plus market opportunities. We think growth may accelerate in a 3-5 year term. Our 12-month target price remains $35.

Kohl's (KSS ): Reiterates 4 STARS (buy)

Analyst: Jason Asaeda

July-quarter earnings per share of 54 cents, vs. 45 cents, beats our 51 cents estimate. Positive customer response to new merchandise reduced clearance inventories. Favorable resolution of certain state tax matters and change of accounting for inventory also helped results. But with Kohl's guiding for October-quarter store preopening costs of $520,000, modestly higher than we had forecast, we are maintaining our $2.46 fiscal year 2006 (January) EPS estimate. We see Kohl's turnaround gaining traction and regard its shares as attractive. Our 12-month target price is $63, lowered today by $1 on updated peer p-e-to-growth and discounted cash flow valuations.

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