S&P Keeps Strong Buy on Wal-Mart

Analyst Joseph Agnese trims his price target for the retailer. Plus: analysts' opinions on Delta Air Lines, Home Depot, and more

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

Analyst: Joseph Agnese

July-quarter earnings per share of 67 cents, vs. 62 cents, is 2 cents ahead of our estimate. Wal-Mart sees fiscal year 2006 (January) EPS of $2.63-$2.70, down from previous guidance of $2.70-$2.74, due to potential sales and margin pressure from rising gas prices. Our fiscal year 2006 EPS estimate remains $2.65. We believe our long-term targets of 8%-plus square footage growth, and 3%-5% comp-store sales growth with margin expansion driven by increased global sourcing are attainable. However, our 12-month target price falls by $3 to $56, based on our updated discounted cash flow and p-e analyses, to reflect potential impact of high gas prices.

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

Analyst: James Corridore

Delta agrees to sell its Atlantic Southeast Airlines regional carrier subsidiary to SkyWest for $425 million, of which $95 million will be held back for 4 years. We think Delta is selling at a fire-sale price, and think the amount of cash generated will not be enough to keep Delta from filing for bankruptcy protection. We think a bankrutpcy filing is likely to come before changes to U.S. bankruptcy law on Oct. 17. We are cutting our 12-month target price to $1, from $1.50 to reflect our view that risks have increased further since our last target price change.

SkyWest (SKYW ): Reiterates 4 STARS (buy)

Analyst: James Corridore

SkyWest agrees to buy, pending approvals, Atlantic Southeast Airlines from Delta Air Lines for $425 million in cash and return of $50 million in aircraft deposits to Delta. SkyWest will hold back $125 million of total amount to protect itself should Delta file for bankrutpcy. We think the planned deal provides a great source of potential future revenue and EPS growth for SkyWest, who has a successful track record working with United Airlines while that carrier attempts to reorganize. We are raising our 2006 earnings per share estimate to $2.10 from $1.90, and our target price to $27 from $24, above peers at 13 times our 2006 estimate.

Home Depot (HD ): Reiterates 4 STARS (buy)

Analyst: Michael Souers

Home Depot posts July-quarter earnings per share of 82 cents, ,vs. 70 cents, 3 cents higher than our estimate. Comp-store sales growth of 4.0% was slightly higher than we had projected, as transactions and average ticket rose sharply. We were also encouraged by the 40 basis points improvement in operating margins, boosted by Home Depot's success in managing selling, general, and administrative costs. In addition, Home Depot raised fiscal year 2006 (January) EPS guidance to $2.58-$2.64 from previous $2.49-$2.58. We are increasing our fiscal year 2006 and fiscal year 2007 EPS estimates to $2.63 and $2.96, from $2.60 and $2.95, respectively. Our 12-month discounted cash flow-based target price remains $48.

J.P. Morgan Chase (JPM ): Reiterates 4 STARS (buy)

Analyst: Mark Hebeka, CFA

J.P. Morgan agrees in principle to settle the case brought by Enron Corp. in bankruptcy court. Subject to the approval of the court, J.P. Morgan will pay $350 million to the bankrupt estate and will give up certain claims it has filed in the bankruptcy. In return, Enron will allow J.P. Morgan's other claims and will dismiss or release all other claims it has against J.P. Morgan. We see this as a positive for J.P. Morgan, putting a potential exposure to rest, and we continue to view it as a well-diversified firm with strong core business and good growth potential. Our 12-month target price remains $43.

Gemstar-TV Guide (GMST ): Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analyst: Gary McDaniel

Shares have fallen 51% year to date; 17% since Gemstar-TV Guide announced the $100 million overhaul of TV Guide magazine. Although we believe that the planned investments in TV Guide and Inside TV magazines are unlikely to pay off, we think Gemstar is now fairly valued and unlikely to significantly decline further. Our target price of $3 is based on a blend of our discounted cash flow model, using a weighted average cost of capital of 11.3% and 3.5% terminal growth, and our historical analysis, which leads us to apply a 24.7 enterprise value multiple to our 2006 EBITDA estimate.

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