S&P Keeps Hold on IBM

Plus: Comments on the outlook for the PC industry, a downgrade on Lehman Brothers, and opinions on more stocks

IBM Corp. (IBM ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Big Blue's third quarter EPS of $1.26 before items, vs. $1.03 one year earlier, beat our $1.18 estimate as better margin performance in hardware and services offset the impact of weaker revenue than we expected. We think hardware sales fell short of our model on longer sales cycles than we had forecast for the new z9 mainframe, and services revenues continuing to struggle after an earlier signings slump. Key for the fourth quarter, in our view, will be continued signings strength, z9 momentum, and better results in Japan. We are raising our 2005 EPS estimate by 10 cents to $4.90. With the shares trading in line with peers at 1.4 times price/sales, we see IBM as fairly valued.

Lehman Brothers (LEH ) : Cuts to 4 STARS (buy) from 5 STARS (strong buy)

Analyst: Robert Hansen, CFA

Given the roughly 27% gain in Lehman shares thus far in 2005, we see less upside relative to our 12-month target price, which remains $130. Nonetheless, we expect Lehman to post strong November quarter results, although down from the record August Quarter, aided by healthy investment banking, capital markets, and asset management revenues. We are leaving our earnings per share estimates unchanged at $10.25 in fiscal year 2005 (ending November) and $10.50 in fiscal year 2006. Recently trading at nearly 11 times our fiscal year 2006 earnings per share estimate, a discount to peers, the shares look attractive on a p-e basis, but less compelling on a price-to-book value basis.

American Standard (ASD ) : Cuts to 3 STARS (hold) from 5 STARS (strong buy)

Analyst: Michael Jaffe

The shares were down sharply Tuesday. Third quarter earnings per share of 75 cents vs. 65 cents, both before one-time items, were 3 cents below our forecast, and American Standard guides lower for the fourth quarter. Its commercial a/c business has been rebounding and residential a/c remains strong, but bath and kitchen extended a long period of weakness, with no real recovery in our sight. We are cutting our 2005 earnings per share estimate by 15 cents to $2.55, 2006's by 40 cents to $2.75. Given American Standard's ongoing troubles in bath and kitchen, we are reducing our long-term cash flow growth forecast to 5%, and cutting our target price by $17 to $41, based on relative p-e and discounted cash flow.

Computer Hardware Sub-Industry (HPQ ) : Reiterates neutral outlook

Analyst: Megan Graham-Hackett

Market researcher IDC reported that third quarter 2005 global Personal Computer unit shipments grew 17%, well above our expectations, as growth was ignited by deep discounts on desktops and home user demand for laptops. While Dell (DELL ), which grew units by 17.8%, continues to gain share, so does Hewlett-Packard (HPQ ) on a worldwide basis; however, HP appears to be continuing to lose share to Dell in the U.S. We are raising our full 2005 PC unit growth forecast to 15% from 8% to 10%, but we note that demand is still focused on low-end systems and we expect pricing competition to remain intense.

Motorola (MOT ): Reiterates 5 STARS (strong buy)

Analyst: Kenneth Leon, CPA

Ahead of the holiday shopping season, Motorola announced 3 new handsets for the 3G/UMTS mobile handset market in Europe. The company says all of these handsets will be available in the fourth quarter. The RAZR V3x is a new add-on to Motorola's bestseller series, with features that include a 2-megapixel camera, a real-time two-way video calling feature, and still and moving image capture. Targeting first the European market, the company is looking to hold or gain share despite strong competition from Nokia (NOK ), Sony Ericsson, and Samsung. Priced below peers on p-e basis, we strongly recommend purchase of the shares.

United Technologies (UTX ): Reiterates 3 STARS (hold)

Analyst: Robert Friedman, CPA

This $40 billion (revenues) conglomerate posted an 8.8% rise in third quarter S&P Core EPS to 74 cents, below our 76 cents estimate. The increase mostly reflects wider profit margins on a 17% rise in revenues. Regarding the company's sustainable earnings growth and profitability prospects, we think its strategy of focusing on businesses that cater to growing markets and post high-margin recurring earnings streams should drive what we view as very respectable 10-year free cash flow growth rates of 7.5%-10% and return on equity of 15%-20%. But as the stock is trading near our discounted cash-flow-based, 12-month target price of $55, we maintain our hold opinion.

SAP ADRs (SAP ): Reiterates 5 STARS (strong buy)

Analyst: Zaineb Bokhari

Ahead of SAP's third quarter results, planned for Oct. 20, we are maintaining our outlook for earnings per ADS forecast of 34 cents, vs. 30 cents. We see revenue growth of about 10%, driven by an 11% rise in licenses and 12% higher services. Our estimates of earnings per ADS remain $1.56 for 2005 and $1.80 for 2006. We are maintaining our 12-month target price of $52, based on an enterprise value/sales of 5.0 times, and p-e-to-growth of about 2.2 times, both at the high end of the shares' three-year historical averages, which we see as warranted by, in our opinion, SAP's superior organic growth and solid execution.

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