S&P Cuts DreamWorks Animation Shares to Strong Sell

Plus: upgrades of the Spanish language broadcaster Univision Communications and Affordable Residential Communities equity ratings, plus more comments Friday

DreamWorks Animation (DWA) : Cuts to 1 STAR (strong sell) from 3 STARS (hold)

Analyst: Tuna Amobi, CPA and CFA

The Glendale, Calif.-based movie company said Thursday that it had fourth quarter earnings per share (EPS) of 34 cents compared to $1.99 EPS during the year ago period. The results include a 27 cents EPS increase associated with a tax benefit on film projects previously written off in 2003, as well as an additional 15 cents EPS reduction for the write-off of the home video Wallace & Gromit: The Curse of the Were-Rabbit, which did not perform as well as expected.

The results were shy of both S&P and Street estimates. Despite best selling home video Madagascar's solid DVD run and the company's highly anticipated May film Over the Hedge, we see most of DreamWorks's 2006 earnings happening late in the fourth quarter, mostly on Hedge's home video release. We don't think the Nov. 2006 film Flushed Away is likely to have any impact until 2007. Also, with DreamWorks Animation's relatively small library, we see increased exposure to newly suggested pricing pressures on catalog titles. Our target price falls by $6 to $22.

Univision Communications (UVN) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Tuna Amobi, CPA and CFA

The Spanish language broadcaster's share prices are up Friday on an unconfirmed report of an imminent buyout bid, by a group including the key partners Mexico's Grupo Televisa (TV) and Venezuela's Venevision, plus private parties. We view the news as possible after last month's 8-K from Univision alluded to an auction. Televisa's participation could remove a major hurdle to the sale, with Univision Communications in a brewing legal tussle with the key program supplier. Also, private equity involvement could address the hurdle on a 25% foreign ownership limit. We now see a deal as more likely, and our 12-month target price rises $2 to $40.

Affordable Residential Communities (ARC) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Robert McMillan

The Englewood, CO-based home community operator said Thursday that its fourth quarter per share funds from operations lost 16 cents (before impairments), compared to 10 cents loss a year ago. This missed our estimate of 6 cents loss. However, revenues rose 9% on higher manufactured home sales and costs were controlled. This suggests to us that management are beginning to turn this business around, though we still view manufactured housing as a difficult business whose customers have low disposable income. We are raising our 2006 FFO estimate to a positive 15 cents per share from a negative 50 cents, and our target price moves to $10 from $8.

Sony (SNE) : Reiterates 3 STARS (hold)

Analyst: John Yang

A Bloomberg News report casts doubt on the feasibility of the spring 2006 timing of Sony's PS3 next-gen gaming console release. While Sony hasn't changed PS3's timing, we would not rule out a possible delay after the recent hint of possible production hurdles on PS3's Cell chip. Still, with PS2s continuing to provide some leverage, in our view, we see minimal downside risk to shares. Also, we view the Cell chip, not PS3, as the key driver for games and electronics units. We also expect improving TV businesses, driven by the Bravia brand, to offset the lack of visibility on the Cell chip.

McData (MCDTA) : Reiterates 3 STARS (hold)

Analyst: Richard Stice, CFA

McData posts January quarter operating EPS of 8 cents vs. 6 cents, 3 cents above our estimate. Revenue rose 8% sequentially, boosted by director-class switch products. We are encouraged that the Intrepid 10000 product line has been qualified with all of its major OEM partners. April quarter results are expected to be hurt by higher health care costs. We are keeping our fiscal year 2007 (ending Jan.) EPS estimate at 19 cents. We remain concerned about competitive threats at the high end of the storage switch market, but we believe recent product introductions should aid results in fiscal year 2007. Our 12-month target price is $4.50.

Pitney Bowes (PBI) : Reiterates 4 STARS (buy)

Analyst: Megan Graham-Hackett

Pitney Bowes says that because of a delay in its efforts to spin off its Capital Services unit, it may look to dispose of the assets through a sale of part or all of the business. The company also agrees to sell its Imagistics International lease portfolio for $280 million to $290 million to De Lage Landen Operational Services, a subsidiary of the Rabobank Group. We think these efforts confirm Pitney Bowes's focus on returning value to shareholders; we note that it is also adding $300 million to its share buyback program. We view Pitney Bowes, trading below historical range at 16 times our $2.77 2006 EPS estimate, as attractive.

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