S&P Picks and Pans: Sprint, DreamWorks, Payless, Lawson

Analyst opinions on stocks making headlines Wednesday

Sprint Nextel (S; $22.02)

Maintains 2 STARS (sell)

Analyst: /T.Rosenbluth

Sprint announces plans to acquire one of its privately held affiliates, Northern PCS, pending necessary approvals, for $313 million. Sprint made multiple affiliate acquisitions in 2005 and 2006, and this latest, if completed, would add 167,000 direct customers. In our opinion, the company is in a transition as competitors take market share. We expect Sprint to offer handset subsidies to stimulate subscriber growth, which we contend will pressure margins. Our 12-month target price of $18 assumes an enterprise value (market capitalization plus net debt) of 7.4 times our 2007 EBITDA estimate, a slight premium to peers.

DreamWorks Animation (DWA; $28.21)

Maintains 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

With Shrek 3's $280 million U.S. box office after 5 weeks somewhat below target amid competition from Disney's (DIS) Pirates 3 and Sony's (SNE) Spider-Man 3, we see final tally well below Shrek 2's $440 million (which led 2004 U.S. box office). But with rival mega-sequels going day-and-date, Shrek 3 may see improved chances overseas as it opens in key territories this month. Still, we would be quite surprised if the current title challenges the prior installment's $480 million overseas grosses. On modestly revised cash flow outlook, we trim our 12-month target price by $3 to $32.

Payless ShoeSource (PSS $32.61)

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

Analyst: Jason Asaeda

Our upgrade is based on valuation following recent declines in share price. In fiscal 2008 (ending January), we look for Payless to sustain positive same-store sales trend and drive incremental margin gains by a focus on trend-right casual and lifestyle product including a likely rise in the percentage of higher-margin branded footwear sold from 25% of sales in fiscal 2007, by marketing that communicates a "new and improved" Payless, and by rollout of new Hot Zone store format that we think is more engaging for customers. We reiterate our $1.70 fiscal 2008 operating EPS estimate and 12-month target price of $40.

Lawson Software (LWSN; $9.82)

Maintains 4 STARS (buy)

Analyst: Zaineb Bokhari

Preliminary May-quarter revenues of $201-$208 million exceed our $193 million forecast, with May-quarter licenses of $37-$40 million, above our $26 million view. Lawson says customers bought its Lawson System Foundation product ahead of a June 1 price hike, adding $6 million to sales. We note that revenues would have exceeded our estimates without this, though we are concerned about the impact this may have on the August quarter. We raise our fiscal 2007 (ending May) EPS estimate by 2 cents to 15 cents, fiscal 2008's by 3 cents to 33 cents, and boost our 12-month target price by $2 to $12, a 2.4 times P/E-to-growth, within historical range, using our fiscal 2008 EPS estimate.

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