S&P Ups Sprint Nextel to Strong Buy

Plus: Analysts downgrade LM Ericsson, upgrade Alcoa, and more

From Standard & Poor's Equity Research

Sprint Nextel (S) : Ups to 5 STARS (strong buy) from 3 STARS (hold)

Analyst: Kenneth Leon, CPA

With Sprint Nextel shares down 28% today from April highs, we think the stock is trading below fair value, which we believe is our target price of $26. This target is based on 7 times our 2006 earnings before interest taxes depreciation and amortization (EBITDA) estimate, just above Regional Bell Operating Company peers. But we think Sprint Nextel, a pure play wireless carrier, will grow faster than RBOCs. Also, we believe strong cash flows create an opportunity for the board to authorize a stock buyback plan. Our 2006 earnings per share (EPS) estimate falls to $1.35 from $1.45 on higher cost of services and Selling General & Administrative expense. We think the shares are attractive, priced near peers, but Sprint Nextel should grow faster.

LM Ericsson (ERICY) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Inger Soderbom

The reduction reflects increased risk we see that margins and profit expectations for the second quarter and 2006 are too high. LM Ericsson has on several occasions been unclear when communicating information about margin trends for the second quarter. We believe it may need to lower its previous industry forecast, from moderate mobile systems growth, to weaker. We will review our 2006 and 2007 EPS estimates after LM Ericsson releases full second quarter results late next week. Given risks we see to its market, and with its shares priced at 15.9 times our current 2006 estimate, we are lowering our 12-month target price by $3 to $35.

LG Phillips LCD (LPL) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Kenneth Leon, CPA

Second quarter loss per share of $1.95 vs. 5 cents loss is much worse than our 4 cents EPS estimate or the Street's 8 cents EPS estimate. Sales in the Korean won fell 6% from the first quarter, the result of a steep drop in average selling prices for flat panel TVs, PC monitors and notebooks. Based on lower prices and unit shipments assumed, we now see 3% sales growth in 2006, and we are lowering our 2006 per-share estimate to a $1.80 loss from an 80 cents profit. With shares at an enterprise value of 2.8 times our 2006 EBITDA estimate, below peers but growing slower, we are cutting our 12-month target price to $19 from $24.

Alcoa (AA) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Leo Larkin

Our upgrade is based on a more positive earnings per share (EPS) outlook. Alcoa posts second quarter EPS of 90 cents, before special charges of 4 cents, vs. EPS of 57 cents on a 19% sales gain, handily beating our 78 cents estimate. Sales and EPS are benefiting from higher alumina and aluminum prices and firm demand for downstream products. We are raising our 2006 EPS estimate to $3.05 from $2.80, based on a more optimistic outlook for overall aluminum prices. Our 12-month target price remains $39. price remains $39. On our revised EPS forecast, Alcoa's projected p-e would be at the low end of its historical range.

Lucent Technologies (LU) : Maintains 3 STARS (hold)

Analyst: Kenneth Leon, CPA

Lucent sees June quarter revenues 9% below its prior $2.34 billion target due to weakness in wireless systems sales from North American customers. We think most of the wireless weakness may be tied to Lucent's largest customer, Verizon Wireless, and to slow spending in China. Lucent Technologies also sees 2 cents EPS for the June quarter, which is two cents below our current 4 cents estimate. We will update our financial model when Lucent releases full quarterly results on July 26. Despite a shortfall of its financial performance, we see the pending merger with Alcatel (ALA), subject to approvals, as a positive for Lucent shares.

Nokia (NOK) : Maintains 2 STARS (sell)

Analysts: Inger Soderbom and Kenneth Leon, CPA

Nokia's June quarter report is due on July 20. We see sales of €9,610 million, in line with Street consensus of €9,657 million. We expect Nokia to make more moves like its venture with Siemens (SI) on the network side, and the dissolving of its partnership with Sanyo (SANYY) on the CDMA handset side. Nokia's next move, we think, will be to relocate manufacturing: We estimate that 52% of its plant facilities are still in high-cost countries. We also see challenges to the restructuring of the operations of the proposed venture between Nokia Networks and Siemens Carrier.

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