S&P: Buy Intel, Hold Sirius

Plus: Analyst opinions on Countrywide Financial, Southwest Airlines, China Telecom, and more

Intel (INTC)

Maintains 4 STARS (buy)

Analyst: Clyde Montevirgen

Intel posts fourth quarter EPS of 26 cents, vs. 40 cents one year earlier, beating our estimate by 2 cents. Revenues rose 11% sequentially due to strong unit sales and average selling prices for mobile and server chips, and were 2% ahead of our view. Gross margins rose slightly from the third quarter, but were hindered by startup costs, write-downs, and lower utilization. We see startup costs and competitive pricing limiting margin growth in the first half of 2007, but expect market share gains and better utilization aiding longer-term growth. We are lowering our 2007 EPS estimate by 5 cents to $1.13, but keeping our 12-month target price of $25.

Sirius Satellite Radio (SIRI)

Maintains 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

An unconfirmed Wall Street Journal report suggests that Sirius and XM Satellite Radio (XMSR; 2 STARS, sell) may be more receptive to exploring merger talks, possibly in 2007. After the sharp slowdown in 2006 holiday retail sales, we are not surprised by increased market speculation on a potential combination of the satellite radio rivals. Still, while the parties may be open to the idea, we see potentially insurmountable regulatory hurdles for such a deal; our view is supported by the FCC Chairman's comments at CES last week. Absent a potential takeover premium, our outlook on the group reflects mixed fundamentals.

Southwest Airlines (LUV)

Reiterates 4 STARS (buy)

Analyst: James Corridore

Fourth quarter operating EPS of 12 cents, vs. 10 cents one year earlier, is one cent off our estimate. We think Southwest's 38th consecutive quarterly profit highlights its superior business model. The company now has oil hedged at $50 a barrel, covering 95% of its 2007 fuel requirements, less advantageous than prior years but still better than peers. We expect the company to continue to improve long-term hedges. We are keeping our 2007 EPS estimate at $1.02, but raising our 12-month target price by $2 to $22, 21.5 times that estimate, above peers but still toward the low end of its historical range. The rise reflects greater confidence in our 2007 estimate.

China Telecom (CHA)

Maintains 3 STARS (hold) on American Depositary Receipts

Analyst: Robert Lin

China Telecom recently launched its IPTV service, originally targeted for the Shanghai area of China, and announced plans to bundle its broadband services and pay TV. We are lowering our 2007 earnings per ADR estimate by 4 cents to $4.36 to reflect our expectation of higher promotional expenses. We are positive on the long-term prospects of this new business, which we expect to contribute higher free cash flow growth. Based on revisions to our discounted cash-flow analysis, we are raising our 12-month target price by $14 to $53. Risks include the company's potential 3G wireless buildout.

St. Mary Land Exploration (SM)

Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: M.Kay

We are lowering our 2006 EPS estimate to $2.92 from $3.08 and 2007's to $3.10 from $4.00, reflecting lower projections for crude oil and natural gas prices. Our 12-month target price, which we have reduced by $8 today, to $31, is based on a blend of 10 times our 2007 EPS estimate, 4.0 times our 2007 discretionary cash flow estimate, a 3.5 times ratio of enterprise value to 2007 EBITDAX, and a DCF model that assumes a weighted average cost of capital at 8.4% and a 3% terminal growth rate. Our lowered opinion on the shares reflects the current downside to our new target price.

Countrywide Financial (CFC)

Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: S. Plesser

We are concerned about Countrywide Financial's credit exposure, as about 9% of production derives from subprime loans. Also, roughly 44% of loans held is comprised of riskier Option ARM loans. These loans have performed well up to now, but they haven't been stress tested, by design; we see such testing occuring sometime in 2007. Finally, we note that Countrywide Financial's reserve ratio is much lower than peers. We are cutting our target price by $4 to $38, 8.4 times our 12-month forward EPS estimate of $4.53, a discount to CFC's 5-year average, which we see as justified by a difficult credit environment.