S&P Keeps Hold on RealNetworks

Analysts also upgrade Mexican telecom giant Telmex and comment on eBay's planned purchase of a VeriSign unit

RealNetworks (RNWK ) : Reiterates 3 STARS (hold)

Analyst: Scott Kessler

We believe the company has settled its antitrust lawsuit against Microsoft (MSFT ), and the companies have scheduled a related conference call for 1 pm EDT. However, we cannot confirm the specifics reported by The Wall Street Journal on Oct. 11, which indicate the deal's value at some $750 million. The agreement could provide for RealNetworks's Rhapsody music service being promoted by Microsoft's MSN. Since filing its lawsuit in Dec. 2003, RealNetworks has incurred some $21 million in antitrust expenses through the second quarter. With a market cap of under $1 billion, we think a $750 million settlement would be a substantial windfall for RealNetworks.

Telefonos de Mexico (TMX ) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Todd Rosenbluth

We expect modest earnings before interest, taxes, depreciation, and amortization (EBITDA) and earnings growth for Telmex in the near term, due in part to the integration of its recent Latin American acquisitions. But while subject to the same technology substitution pressures that are negatively impacting other North American wireline providers, in our opinion, we contend that Telmex is well positioned relative to peers, given its greater regional reach through its Latin American exposure, and a mass market voice and data products. We are raising our target price to $24 from $21 due to smaller discount to peer p-e multiple. Telmex recently yielded 3.3%.

U.S. Bancorp (USB ): Downgrades to 4 STARS (buy) from 5 STARS (strong buy)

Analyst: Mark Hebeka, CFA

While we believe USB's low-cost banking model holds a competitive advantage, we are concerned by continued pricing pressure, which we view as a long-term issue along with a difficult interest rate environment. With an above-average amount of revenue coming from fees, we believe USB is partially insulated but we do not see enough earnings catalysts to help fully offset challenges. Our 2005 EPS estimate remains $2.42, but we are cutting our 2006 forecast to $2.61 from $2.67. We are also lowering our 12-month target price to $32 from $35, 12 times our 2006 EPS estimate, a slight premium to peers.

VeriSign (VRSN ) : Reiterates 4 STARS (buy)

Analyst: Scott Kessler

The company announced the proposed sale of its payment gateway business to eBay (EBAY ), in a transaction valued at some $370 million in cash and/or stock. At what we estimate to be about 6 times the unit's projected 2005 sales, we think VeriSign would receive excellent value in the deal. We expect the transaction to close by year's end, pending approvals. Also, VeriSign will provide eBay and PayPal with security services to enhance their protections against online identity theft. We believe these are favorable developments for VeriSign, as it focuses on security and communication solutions.

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