S&P Keeps Hold on Google

Analyst Scott Kessler says he is surprised by Google's filing to sell more shares. Plus: Hot Topic, Six Flags, and more

Google (GOOG ): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

The shares are lower, as Google files to sell up to 14.8 million shares at $283.10 a piece, to raise up to $4.2 billion. Google would use the proceeds for purposes that would include capital expenditures and acquisitions. We are surprised by this news, as Google had $2.9 billion in net cash and investments as of June 2005. In August, Google raised its 2005 capex forecast to $700 million, from $600 million forecasted in May and $500 million in March; up from 2004's $319 million. The one-year anniversary of Google's IPO is tomorrow; we think this could lead to selling related to capturing the long-term capital-gains tax rate.

Hot Topic (HOTT ): Downgrades to 2 STARS (sell) from 3 STARS (hold)

Analyst: Jason Asaeda

July-quarter earnings per share of 2 cents, vs. 10 cents, misses our estimate by a penny, hurt by heavy markdowns in the core Hot Topic business. With the segment's narrow fashion focus contrasting with prevailing color and style trends, we see Hot Topic's negative comps trend continuing. We view the company's smaller Torrid business, which carries more mainstream fashion, as a promising long-term growth vehicle. But given our view of Hot Topic's weak market positioning, we are lowering our fiscal year 2006 (January) EPS estimate to 55 cents from 88 cents, and our target price to $13 from $18, on p-e-growth and discounted cash flow valuations.

Six Flags (PKS ): Upgrades to 3 STARS (hold) from 1 STAR (strong sell)

Analyst: Gary McDaniel

Red Zone, an investment company owned by Dan Snyder, files a consent solicitation seeking control of Six Flags. Red Zone plans to launch a tender offer at $6.50 per share to obtain 34.9% of the shares outstanding, provided the board nullifies the poison pill and replaces the CEO, CFO, and Stan Shuman as directors with Snyder, who would be chairman, Mark Shapiro, who would be CEO, and Dwight Schar, the chairman of NVR, Inc. We believe Six Flags shareholders are likely to accept this proxy, therefore we are raising our 12-month target price to $6.50 from $3.50.

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

Analyst: Richard Stice, CFA

Network Appliance posts July-quarter operating earnings per share of 16 cents, vs. 13 cents, in line with our reduced forecast. Revenues increased 25% year-over-year, but declined modestly sequentially. Gross margin of 61.2% exceeded our 60.5% estimate, and was aided by higher software-related sales. Our fiscal year 2006 (April) EPS estimate increases by 1 cent to 76 cents. We are encouraged by what we view as Network Appliance's strengthening industry position and new product offerings. However, we believe these factors are already being reflected in the current share price. Our 12-month discounted cash flow and relative p-e-to-growth-based target price remains $27.

Medtronic (MDT ): Reiterates 3 STARS (hold)

Analyst: Robert Gold

July-quarter operating earnings per share of 50 cents, vs. 43 cents, meets our estimate and 15% sales growth was in line. We think Medtronic captured a few points of global ICD share, aided by product launches and withdrawal of products by Guidant (GDT ), but overall ICD market growth of 26% was above our view. Medtronic performed well in the spine and diabetes markets, in our view. Gross margin weakness was offset by a lower tax rate. We see fiscal year 2006 (April) sales of $11.6 billion and EPS of $2.15, though we think EPS growth will be supported by tax rate management rather than margin expansion. Our target price remains $58.

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

Analyst: Megan Graham-Hackett

Based on our revised discounted cash flow (DCF) and price-sales analyses, we are raising our 12-month target price on H-P shares to $28 from $24. Our revised DCF analysis includes our free cash flow growth assumption of 8% compounded average growth rate for the next 15 years, compared with our prior rate of 7%; our weighted average cost of capital remains 11%. The revision primarily reflects better asset management year-to-date, particularly in managing accounts receivable, than we had previously projected. On a price-sales basis, we believe the shares can trade at 0.9 times our fiscal year 2006 (October) revenue per share estimate, in line with its historical range.

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