S&P Cuts Mercury Interactive to Hold
Mercury Interactive (MERQE ) : Cuts to 3 STARS (hold) from 4 STARS (buy)
Analyst: Zaineb Bokhari
Preliminary third quarter revenues of $198 million and $203 million are below the company's $205 million to $215 million guidance and our $213 million estimate, hurt by delayed deals and ongoing issues at European operations. We are concerned that weakness in Europe could put the fourth quarter at risk. We are cutting our 2005 earnings per share estimate by 14 cents to $1.34, and 2006's by 27 cents to $1.44. Mercury Interactive also disclosed that the Securities and Exchange Commission has begun a formal inquiry into past stock option grants, and we see this as an overhang on the shares until resolved. Our 12-month target price falls $9 to $37, based on 1.5 times p-e-to-growth on our 2006 estimates, near the low of past averages.
FedEx (FDX ) : Reiterates 4 STARS (buy)
Analyst: James Corridore
FedEx announced a 2006 average rate increase of 5.5%, which, partly offset by a 2% fuel surcharge reduction, results in a net 3.5% hike that is in line with what we expected and past years' hikes. We think the reduction of the fuel surcharge could be reversed if oil prices stay high and if the rate increase does not meet significant resistance from customers. Our fiscal year 2006 (ending May) earnings per share estimate remains $5.43. Our 12-month target price stays $99, 18 times our fiscal year 2006 earnings per share estimate, at the low end of FedEx's historic p-e range to reflect concerns about the U.S. economy and oil prices.
Polaris Industries (PII ) : Cuts to 1 STARS (strong sell) from 2 STARS (sell)
Analyst: Mark Basham
The backdrop of rising interest rates, high energy prices and high levels of consumer debt leads us to raise our risk ranking for Polaris to high from medium. We think rising rates will crimp low-rate financing for consumers to purchase the company's ATV's, snowmobiles and motorcycles, while high energy prices and debt levels will likely raise consumer caution about making these types of discretionary purchases. We are raising our 2005 EPS estimate to $3.30 from $3.15, but reducing our 2006 forecast to $3.00 from $3.15, and lowering our discounted cash-flow-based target price by $9, to $39.
ADC Telecommunications (ADCT ) : Maintains 3 STARS (hold)
Analyst: Ari Bensinger, Kenneth Leon, CPA
ADC lowered October quarter guidance due to seasonal changes in carrier spending for fiber-to-the-X (FTTX) products, which account for 25% of total sales, according to the company. It sees October quarter sales of $290 million to $300 million, $20 million below our estimate, and we expect further seasonal weakness in the January quarter. ADC sees October quarter earnings per share of 15 cents to 19 cents vs. 13 cents in the October quarter of 2004, excluding special items, below our 27 cents estimate and the Street's 28 cents. While we will review our estimates after this morning's conference call, we still view ADC as well positioned for the broadband market.