S&P: Still Buy Microsoft, Sell Yahoo

Plus: Analyst opinions on Sunoco, Career Education, and more

Microsoft (MSFT)

Reiterates 4 STARS (buy)

Analyst: Jim Yin

According to unconfirmed reports from the Wall Street Journal, Microsoft has re-entered formal negotiations to acquire Yahoo. Our reaction to a proposed merger in mixed. By combining their customers and content, the merged company could better compete against Google (GOOG) in the online advertising market. However, we are concerned about integration as Microsoft and Yahoo have different corporate cultures. We believe the merger does not address the gap in search-engine technology between Microsoft and Google. We think the deal would be dilutive to Microsoft's EPS.

Yahoo (YHOO)

Reiterates 2 STARS (sell)

Analyst: Scott Kessler

Shares are surging in pre-market trading after unconfirmed reports from the Wall Street Journal and others indicate that Microsoft is interested in buying Yahoo. A $50 billion valuation ($35/share) has been suggested. We are skeptical. Both Microsoft and Yahoo already have signficant global reach and expansive online offerings. Their Internet businesses have struggled, we think, due largely to monetization shortcomings, which such a merger would not address. Ironically, the companies' advertising partnership ended last year; we think something similar would make more sense.

Sunoco (SUN)

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

Analysts: T. Vital, S. Ham, CFA

Sunoco reports first quarter 2007 operating EPS of 70 cents, vs. 59 cents one year earlier, excluding a 74 cents gain. This falls short of our estimate of $1.59, reflecting lower production volumes and higher expenses, despite higher realized margins. This was caused by the significant maintenance and expansion at the company's Philadelphia refinery, which is complete. We are cutting our 2007 EPS estimate by $2.53 to $5.18, and 2008's by 35 cents to $6.11. Blending discounted cash-flow and relative valuations leads us to lower our 12-month target price by $5 to $68, an enterprise value 5.8 times our 2008 EBITDA estimate, a slight discount to peers.

Career Education (CECO)

Reiterates 5 STARS (strong buy)

Analyst: Michael Jaffe

First quarter continuing operations EPS of 36 cents, vs. 65 cents one year earlier, is 3 cents above our forecast. The decline is largely on results at the company's American InterContinental University, still on probation with its accrediting board. We believe the shares are up 17% this morning on firming student population trends and a 12% rise in April starts. Our 2007 and 2008 EPS estimates stay $1.40 and $1.65. On top of what we view as improving operating trends, we think the company is taking proper steps to get accrediting probation lifted in next review in late 2007. Our 12-month target price remains $42.

Cost Plus CPWM

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

Analyst: Michael Souers

Excluding charges, Jan. quarter of $0.51 vs. $0.83 is $0.19 lower than our estimate and $0.31 below Street's. And fiscal year 2008 (ending Jan.) guidance, as sales continue to slump, is well short of what we had projected. As a result, we are widening our fiscal year 2008 loss estimate to $0.83, from a loss of $0.13. We are initiating fiscal year 2009 at a loss of $0.24. However, we think Cost Plus's focus on lowering capital spending by opening fewer stores, along with reducing advertising expense and promotional activity, will bear fruit over long term. We are raising our 12-month target price to $10 from $8.50.

First Energy FE

Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Justin McCann

Following the 16% year-to-date rise in the shares, we view them as fairly valued. First quarter operating EPS of $0.88 vs. $0.67 is $0.03 above our estimate. EPS increased by $0.24 from the generation segment, reflecting both higher wholesale power prices and demand, and absence of costs related to prior year-ago planned power plant outages. We are raising our 2007 and 2008 EPS estimates by $0.05 each, to $4.25 and $4.30. We are raising our 12-month target price by $3 to $73, a premium-to-peers P/E of 17 times our 2008 EPS estimate.

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