S&P Keeps Hold on DaimlerChrysler

Analyst Efraim Levy thinks its Mercedes unit should benefit from offerings like the new M-Class. Plus: Opinions on Dex Media and China Telecom

DaimlerChrysler (DCX ): Maintains 3 STARS (hold)

Analyst: Efraim Levy, CFA

Chrysler Group's September sales volume rose 4% year to year and Mercedes-Benz USA saw a sales volume increase of 0.6%. Unlike Ford, which saw sales decline sharply following months of sales aided by its employee-pricing-for-all promotion, the Chrysler Group, to its credit, in our view, continued to post favorable year-to-year sales comparisons. The company benefited from what we see as successful new products, and we believe that Mercedes-Benz sales should also continue to benefit from the introduction of new products, such as the new 2006 M-Class.

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

Analyst: Megan Graham-Hackett

We view favorably HP's planned acquisition of privately-held server blade maker RLX Technologies. Terms weren't disclosed but the deal is expected to close in 30 days, subject to conditions. Blade servers are one of the fastest growing server categories, and we think HP's strategy is to grow its exposure here as well as add RLX's management features to HP's offerings. We think HP is slowly strengthening its solutions portfolio through a string of recent small acquisitions and we continue to view the shares, trading at a price/sales of 1 times, below peer average, as worth holding.

Reliant Energy (RRI ) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Yogeesh Wagle

Reliant Energy agreed to sell its three New York City power plants for about $975 million. The company plans to use proceeds from the sale, which is subject to regulatory approvals, toward reducing debt. Over the next several years, we expect widening wholesale power margins, declining legal expenses and lower capital spending to drive increasing levels of free cash flow, which we estimate at $350 million in 2006. Our 12-month target price rises by $4 to $18, based on discounted cash flow analysis, with an assumed terminal growth rate of 3% and a weighted-average cost of capital of 11.5%.

Dex Media (DEX ) : Maintains 3 STARS (hold)

Analyst: Gary McDaniel

Dex, whose shares have risen 9% in the past three weeks amid takeover speculation, announced a definitive agreement to be acquired by RH Donnelley (RHD ) for $27.58: $12.30 in cash and 0.24154 RH Donelley shares per Dex share. With the offer near Friday's close, we believe Dex's shareholders will approve the deal, since Carlyle and Welsh, and Carson, own 52% of Dex shares and have agreed to support the sale. The transaction is expected to close in the first quarter of 2006, subject to standard approvals. Dex shareholders will have 53% ownership of the combined entity.

China Telecom (CHA ) : Maintains 3 STARS (hold)

Analyst: David So and Todd Rosenbluth

We continue to believe that China Telecom's results will be driven by broadband growth and we expect the growth momentum in IPTV services to continue in the mid-to-long term. We see the potential for China Telecom to gain a mobile license next year as a result of consolidation and/or restructuring in China. Our 12-month target price rises to $39 from $38, based on our discounted cash flow analysis that includes assumptions of a weighted-average cost of capital of 15.2% and robust free cash flow growth from 2006 to 2020, thanks to what we see as a strong demand for non-voice and value-added services.

Research In Motion (RIMM ) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Kenneth Leon, CPA

We recommend purchase of Research in Motion shares despite increased competition and potential risks from an outstanding lawsuit by NTP against the company. With about $10 a share of net cash, we see Research in Motion as well funded and it has already reserved $450 million related to the proposed NTP settlement. We do see more competition from Nokia (NOK ) and other device suppliers, but the global market for Blackberrys is rapidly growing. After a 15% pullback in the stock price in the last two weeks, we believe the shares are attractive; our 12-month target price remains $86.

Scotts Miracle-Gro (SMG ) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Stewart Scharf

We project mid- to high single-digit sales growth in fiscal year 2006 (ending September), mainly on growth in the North American consumer lawn and garden segment. We expect wider operating margins on $25 million to $30 million in cost savings as Scotts Miracle-Gro streamlines its operations. However, we think higher fuel costs could offset price hikes, while our valuations now indicate market performance. We are trimming our fiscal year 2005 earnings per share estimate by 7 cents to $4.30. Our target price on the shares, which are trading at 17 times our $5.10 fiscal year 2006 estimate, are on par with S&P's 400 and its closest peers -- $87.

Keithley Instruments (KEI ) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Richard Tortoriello

We see Keithley benefiting from the expansion of wireless handset manufacturing lines, as we expect wireless unit sales to rise 25% in calendar 2005, with continued momentum into 2006, as emerging market handset demand has exceeded expectations. We also forecast an uptick in demand for semiconductor equipment, as we see semiconductor capacity utilization increasing. In addition, we believe recent strength in the dollar will help Keithley reduce its overseas expenses. We see earnings per share of 59 cents in fiscal year 2005 (ending September), with growth to 71 cents in fiscal year 2006. Our 12-month target price is $18.

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