S&P Picks and Pans: IBM, Motorola, Continental, UnitedHealth

Analyst opinions on stocks making headlines Thursday

IBM Corp. (IBM; $111.08)

Maintains 5 STARS (strong buy)

Analyst: Dylan Cathers

IBM's second quarter operating EPS of $1.50 vs. $1.30 beats our estimate by 3 cents. We see revenue growth of 7.5% for full 2007, reflecting rising demand for services and software, particularly IBM's key middleware offerings. We think gross margin will widen on improved operational efficiencies and better sales mixes, but we look for net margin to be flat on increased investments in the business, integration of acquisitions and higher interest costs. We are raising our 2007 EPS estimate by 4 cents to $6.92, and our 12-month target price by $9 to $127, on a peer-based price-to-earnings ratio of 18.4 times our estimate.

Motorola (MOT; $18.19)

Maintains 3 STARS (hold)

Analyst: Todd Rosenbluth

Following Motorola's second quarter call to review EPS that beat our projection by 2 cents, we are concerned that the company's steps to turn itself around will take longer than expected. On the mobile handset side, we are lowering our forecast for shipments in late 2007 and in 2008 to reflect Motorola's challenges in the low end of the market. We are reducing our 2007 EPS estimate 14 cents, to 16 cents, and our 2008 15 cents, to 64 cents. However, despite weaker revenues, we believe Motorola's gross margin will be relatively stable, and we see improvements in its cash generation helping support share buybacks.

Continental Airlines (CAL; $36.90)

Reiterates 3 STARS (hold)

Analyst: Jim Corridore

Second-quarter EPS of $2.03, vs. $1.84, is 2 cents below our estimate but well ahead of the Street's $1.84 consensus forecast. Results were aided by strong international growth and yields, and costs were well controlled, in our view. We expect Continental to continue to outperform peers due to its international growth and its strong market share among business travelers. However, we remain concerned about domestic pricing and about oil prices. We are keeping our 2007 EPS estimate at $4.50 and setting 2008's at $4.75. We are raising our target price to $42 from $40, valuing Continental at about 9 times our 2008 estimate, a bit below peers.

UnitedHealth Group (UNH; $51.76)

Reiterates 4 STARS (buy)

Analyst: Phillip Seligman

Second-quarter operating EPS of 87 cents vs. 70 cents beats our estimate by 6 cents. UnitedHealth's overall medical care ratio was lower than we expected, on good cost control in its Medicare unit. While we are disappointed by a rise in the commercial medical care ratio and by tepid commercial enrollment growth so far in 2007, we are optimistic about new products/programs and expansion plans for 2008. We also like UnitedHealth's financial flexibility, given its strong cash flow, and its diversification. We are raising our 2007 EPS estimate by 3 cents to $3.48, but we are maintaining our target price of $62.

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