S&P Keeps Hold Opinion on Google

Analyst Scott Kessler says notable inroads by Google into instant messaging will take time. Also: opinions on Plantronics, Applebee's, and more

Google (GOOG ): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Google unveils Google Talk, software that allows for instant messaging and associated voice communication. We believe this is the logical next step toward Google becoming more portal-like, having previously offered e-mail and customized content. Although Google owns the world's most popular search engine, users spend less time with its offerings than those of Yahoo (YHOO ) or Microsoft (MSFT ), in our opinion, largely due to their popular messaging services. We expect Google Talk to help Google close this gap, but we think making notable inroads will take much time.

Plantronics (PLT ): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Ari Bensinger

We see an increasingly competitive environment for next generation Bluetooth headsets exacerbating industry pricing pressures. Accordingly, we believe Plantronics' gross margins will be hurt by a rising sales shift towards wireless headsets. We are also wary of negative financial impact on Plantronics' operating model from the recent acquistion of Altec Lansing. Accordingly, we are reducing our fiscal year 2006 (March) EPS estimate to $1.77 from $1.91. Based on revised relative and discounted cash flow analysis, reflecting our view of Plantronics' higher risk profile, we are lowering our 12-month target price to $35 from $45.

Luby's (LUB ): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: William Mack, CFA

Luby's recent rally toward 52-week highs eliminates much of the upside we had seen. Our unchanged 12-month target price of $16 implies a further 20% advance from recent levels, but we think that fails to offset the risk we see in the shares, up six-fold from late-2003 lows. Our fiscal year 2005 (August) and fiscal year 2006 EPS forecasts remain 65 cents and 80 cents, and we still view Luby's profit turnaround as ongoing. To arrive at a projected enterprise value for Luby's, we apply an 8.5 multiple to our $54 million fiscal year 2006 restaurant-level operating profit estimate, and adjust for projected net debt.

Applebee's International (APPB ): Maintains 4 STARS (buy)

Analyst: William Mack, CFA

Applebee's reports that system-wide comparable sales rose 1.3% in August, but this includes a 1.5% drop at company-owned units. The company says that recent weakness appears ongoing, particularly in the Midwest and New England. We are reducing our 2005 EPS estimate to $1.40 from $1.47 and 2006's to $1.45 from $1.53. We are lowering our 12-month target price, arrived at by applying a p-e multiple of 18 to our lowered 2006 EPS forecast, to $26 from $29. This valuation implies a slight premium to peers, merited by returns and margins we view as relatively favorable.

Corinthian Colleges (COCO ): Reiterates 3 STARS (hold)

Analysts: Michael Jaffe and James Corridore

Corinthian Colleges plans to restate revenues for fiscal years 2001-2004 (June) and three quarters of fiscal year 2005 to reflect a changed method for recognizing revenues. This will lead to a $16.9 million drop in retained earnings and an earnings per share reduction of l4 cents for fiscal year 2001-2004 and 5 cents for three quarters of fiscal year 2005. While we do not think these changes are material, the process highlights our view that Corinthian Colleges shares have a higher risk profile than average, and adds to recent execution issues. At a sizable discount to our estimate of fair value, we would hold Corinthian Colleges shares. Our 12-month target price remains $15.

WPP Group (WPPGY ): Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analyst: Yannick Mathieu

In our view, WPP, Publicis Groupe SA (PUB ), and Omnicom (OMC ) belong to a select group of advertising agencies that are outperforming peers Havas SA (HAVS ) and Interpublic (IPG ), and capturing market share from other smaller players. Thus, we think WPP is entering a much more favorable revenue growth period than the past few years, and we are raising our 12-month target price to $57 from $51. Reflecting the new IFRS accounting standards, we are lowering our 2005 earnings per ADS estimate to $3.09 from $3.60, and introducing our 2006 estimate of $3.66.

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