S&P Keeps Hold on Hewlett-Packard

Analyst Megan Graham-Hackett says while H-P showed solid progress in some areas, the July quarter was mixed. Plus: opinions on Nordstrom and more

Hewlett-Packard (HPQ ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

July-quarter non GAAP earnings per share of 36 cents, vs. 24 cents, beats our 29 cents estimate. We view EPS quality as OK, as weaker gross margin than our model was offset by stiff cuts in selling, general, and administrative (SG&A) costs and higher interest/other income. Revenue growth of 10% beat our 8.5% forecast on strength in servers and notebooks. We were less encouraged by the year-over-year erosion in margins in printing and services, and losses in software. Our fiscal year 2005 (October) EPS estimate rises by 6 cents to $1.53. While H-P showed solid progress in some areas, we still see the July quarter as mixed; but at a below-peer price-sales of 0.8, we view the stock as worth holding.

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

Analyst: Jonathan Rudy, CFA

Microsoft announces that the upcoming X-Box 360 will be priced at $299.99 in North America, and €299.99 in Europe, in line with our expectations. It also announced a special model with a number of accessories for $399.99 in North America, and €399.99 in Europe. We continue to anticipate a November launch, and expect it will be the key driver for Microsoft's Home and Entertainment division this holiday season. With a number of significant product cycles approaching over the next year, and with its shares trading at a discount to our 12-month target price of $33, we would buy Microsoft.

Applied Materials (AMAT ): Maintains 4 STARS (buy)

Analyst: Colin McArdle

Applied Materials posts July-quarter earnings per share of 15 cents, excluding an 8-cents tax benefit, vs. 26 cents, 1 cent above our expectations, as in-line revenue combined with slightly better gross margins, in our opinion due to material cost savings. Applied Materials' comments regarding capacity utilization among customers, rising DRAM prices, and renewed purchasing by foundries all support our ongoing belief that demand for semiconductor equipment will rebound in second half of 2005. Due to seasonality, Applied Materials suggests flat October-quarter EPS, and we are lowering our full fiscal year 2005 (October) EPS estimate to 65 cents from 69 cents; we see 75 cents in fiscal year 2006.

Borders Group (BGP ): Reiterates 2 STARS (sell)

Analyst: Jason Asaeda

July-quarter earnings per share of 2 cents, vs. 11 cents, misses our estimate by 2 cents. Results were hurt by soft sales in the U.K., which accounts for about 70% of international sales, by heavy discounting of the new Harry Potter book, and by costly store remodels. With weak U.K. sales trend and planned October-quarter remodels, we are cutting our fiscal year 2006 (January) EPS estimate by 10 cents, to $1.65. We see fiscal year 2007 at $1.88, assuming gradual productivity improvement in remodeled stores. But given fundamentals we still see as weak, we view Borders shares as unattractive, trading above our 12-month target price, unchanged at $22.

Photronics (PLAB ): Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: Colin McArdle

July-quarter earnings per share of 31 cents before 4 cents of net one-time items, vs. year-ago 23 cents, is a penny above our estimate. Revenue met our forecast, despite operational issue in Europe. Worldwide demand, particularly in Asia and North America, was robust, and we continue to believe chip demand will rebound in the second half of calendar 2005. Based on our expectation for high customer capacity utilization rates and increasing capex, we think 2006 will also be healthy. We are maintaining our target price of $26, based on a p-e multiple of about 22 times our fiscal year 2006 estimate of $1.20, in line with peers.

Nordstrom (JWN ): Reiterates 4 STARS (buy)

Analyst: Jason Asaeda

July-quarter earnings per share of 53 cents, vs. 37 cents, beats our 48 cents estimate on strong full-price selling. Expenses were also well-leveraged on 6.4% same-store sales growth. We are lifting our fiscal year 2006 (January) EPS estimate by 5 cents to $1.85, as we now project fiscal year 2006 pretax margins to reach 11.0%, up from a year-ago's 9.1%, on a favorable sales outlook. But we are slightly decreasing our long-term EPS growth assumption, as we think Nordstrom's impressive fiscal year 2006 margin gains will be difficult to match. We are lowering our 12-month target price by $3 to $38 on updated discounted cash flow and p-e-to-growth valuations.

Qwest Communications (Q ): Reiterates 2 STARS (sell)

Analyst: Todd Rosenbluth

We believe the wage hike component of the tentative labor agreement Qwest signed last night with its unionized workforce (approximately 60% of Qwest's employees) will make it difficult for this predominantly wireline carrier to widen its 29% EBITDA margins near the 38% range of its peers. Coupled with relatively low DSL and long-distance penetration rates in the face of increasing cable competition, Qwest's exceedingly high debt-to-equity ratio and lack of a dividend, we believe the shares deserves to trade at a discount to peers on an enterprise value/EBITDA basis, not at the current premium.

Before it's here, it's on the Bloomberg Terminal.