S&P Keeps Hold on Boeing After Earnings Drop

Analysts change recommendations on Forward Air, Edwards Lifesciences, and Pharmion, plus comments on Sprint Nextel and more

Boeing (BA ) : Reiterates 3 STARS (hold)

Analyst: Robert Friedman, CPA

The $55 billion revenue aerospace giant posts a 77% drop in third quarter S&P Core earnings per share to 11 cents from the year-ago 48 cents. This misses our 46 cents estimate, mostly on strike-related charges. Looking at Boeing's sustainable earnings per share growth and return on equity prospects, we believe Chief Executive Jim McNerney will be able to transform Boeing's mature jetliner and military hardware offerings into platforms that can post higher-margin recurring earnings per share streams from services and consumables. As a result, we project 10-year free cash flow growth rates of up to 8.5% and return on equity up to 17%. But with Boeing trading near our $70 target price, we would hold.

Sprint Nextel (S ) : Maintains 4 STARS (buy)

Analayst: Kenneth Leon, CPA

Sprint posted third quarter earnings per share of 41 cents vs. 31 cents, before special items, a penny below our estimate. Sales rose 8%, led by low-teens growth in the wireless unit, which provides 72% of the company's total sales but booked only 669,000 new net postpaid subscribers, down from 950,000 in the second quarter. We believe the sequential decline is related to Sprint's effort to rebrand wireless services after the merger closed in August. While transition issues remain, we believe Sprint can regain its premier wireless ranking. We are lowering our 2005 earnings per share estimate to $1.50 from $1.59 but raising 2006's to $1.75 from $1.65.

Daimlerchrysler (DCX ) : Reiterates 3 STARS (hold) Opinion

Analyst: Yannick Mathieu

Third quarter earnings per share of 89 cents vs. $1.13 matches our estimate, but a higher tax rate hides what we view as a faster turnaround in the Mercedes Car Group than we had expected. With other units continuing to perform well, we are raising our 12-month target price by $3 to $54. Our 2005 earnings per share estimate remains $3.20 as Mercedes performance is expected to be offset by a fourth quarter charge from recently announced layoffs. Our new target price uses a higher Mercedes valuation in our discounted cash flow model, economic profit valuation of core automotive business, and separate valuations of investments and financial services.

Forward Air (FWRD ) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Jim Corridore

Forward posted third quarter earnings per share of 38 cents vs. 27 cents, beating our 32 cents estimate and the Street's 37 cents. After two quarters of revenue that we found disappointing, third quarter revenue growth exceeded our expectations, rising 18%. Forward Air is doing a good job leveraging revenue growth with good expense controls, in our view, and operating margin improved by 280 basis points. We are raising our 2005 and 2006 earnings per share estimates to $1.44 and $1.65, from $1.30 and $1.50. We are raising our 12-month target price to $43 from $37, valuing the stock at 26 times our 2006 earnings per share estimate, in the middle of Forward Air's historical p-e range.

Edwards Lifesciences (EW ) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Robert Gold

Third quarter operating earnings per share of 46 cents vs. 38 cents is 2 cents above our estimate, with upside largely driven by higher gross margin and a lower tax rate than we forecast. We are impressed by market-share gains for the Magna heart valve and see its product line extensions helping to drive incremental sales growth in 2006. We are increasing our 2005 sales estimate by $5 million to $1.0 billion and our earnings per share estimate by 2 cents to $1.97. We see 2005 free cash flow reaching $130 million. We see $2.15 2006 earnings per share, including option costs. We are raising our target price by $3 to $48, based on peer-average p-e-to-growth of 1.8 applied to our 2006 est.

Pharmion (PHRM ) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Jeffrey Loo, CFA

Third quarter earnings per share of 27 cents vs. a loss of 1 cent is 11 cents above our view on lower-than-expected SG&A costs. But sales of Vidaza appear to be plateauing, growing only 5% sequentially. To stimulate sales, Pharmion plans to begin "compassionate use" sales in Europe in 2006. More importantly, in our view, is the delay until 2007/2008 of potential European approval of Vidaza due to requests for more data. Our 12-month target price falls by $15 to $25 on revised discounted cash flow analysis, as we see the time frame for European approval for Vidaza and Thalidomide pushed back 24 months from our prior expectation.

Electronic Manufacturing Services Sub-Industry : Cuts to neutral from positive

Analyst: Richard Stice, CFA

We continue to believe the long-term trend toward outsourced manufacturing remains intact. However, recent data points from industry participants suggest that end-market demand is not expected to improve meaningfully over the next two quarters and competition from Taiwanese-based manufacturers is accelerating. We continue to favor names with significant market-share positions and ample low-cost geographic manufacturing. Our top picks include Benchmark Electronics (BHE ), Flextronics International (FLEX ) and Jabil Circuit (JBL ).

Enterprise Products Partners (EPD ) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Royal Shepard

Third quarter earnings per unit of 29 cents vs. 20 cents, beats our 23 cents estimate. Reduced volumes and facility repairs related to recent hurricanes were more than offset by strong demand for motor gasoline additives. We expect a similar pattern in the fourth quarter. We are raising our full 2005 earnings per share estimate by 7 cents to 94 cents. In 2006, we expect higher gross margin from natural gas pipelines and improved returns from investments in offshore transportation assets. We are increasing our 2006 earnings estimate by 6 cents to $1.15. We are raising our target price by $2 to $29 based on relative yield and discounted cash flow valuations.

Grant Prideco (GRP ) : Ups to 4 STARS (buy) from 2 STARS (sell)

Analyst: Stewart Glickman

Third quarter earnings per share of 49 cents before one-time charges of 12 cents, vs. 14 cents, beats our estimate by 5 cents. Revenues rose 11% over the second quarter and operating margins widened in all three segments. We see better pricing traction in 2006 and are raising our 2006 earnings per share estimate to $2.46 from $1.89. Grant Prideco is at 9.7 times estimated 2006 earnings before interest, taxes depreciation and amortization, or EBITDA, below peers' 9.9 times, and in line with peers on price/cash flow. But our discounted cash flow model, using free cash flow growth of 7% per year for 10 years and 3% thereafter, discounted at a weighted average cost of capital of 9.6%, shows shares as undervalued. Blending, we are raising our target price by $11 to $43.

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