S&P Picks and Pans: Infosys, Live Nation, Warner Music, Nordstrom
S&P DOWNGRADES RECOMMENDATION ON AMERICAN DEPOSITARY SHARES OF INFOSYS TO HOLD FROM BUY
September-quarter earnings per ADS of 48 cents vs. 35 cents are 2 cents above our estimate. However, Infosys shares are down 6% this morning after the company cut revenue growth guidance in local currency terms. We believe visibility is limited for 2008, based on rising rupee against U.S. dollar and a possible slowdown in the U.S. economy. We are raising our fiscal 2008 (Mar.) earnings per ADS estimate by 2 cents, to $1.94. However, we lower our 12-mo target price by $4, to $56, on a peer-average P/E-to-growth at 1.1 times, using our calendar 2008 estimate of $2.17 and a reduced three-year growth rate view of 23.5%. /D. Cathers
S&P MAINTAINS SELL OPINION ON SHARES OF LIVE NATION
S&P MAINTAINS BUY OPINION ON SHARES OF WARNER MUSIC GROUP
We think an unconfirmed Wall Street Journal report lends credence to likely imminent comprehensive long-term Live Nation deal starting 2008 with Madonna, to begin after likely 2008 release of final album under her contract with Warner Music. We view report as credible, given similar recent report in trade journal Billboard. Encompassing recording, touring, concerts, merchandise and licensing, the unprecedented deal could shift the industry landscape. Still, despite the potential merits of a link with the pop icon, we see risks for the concert promotion giant wading into uncharted territory, and yet to show sustainable profit. Also, it is unclear how Live Nation plans to boost its infrastructure, as talks with IAC's (IACI) Ticketmaster seem to stall.
As for Warner Music, despite potential headline risk with departure of arguably the company's leading artist, we think decision ultimately reflects financial prudence, particularly given reported terms of pop star's unprecedented pending deal with concert promoter. Also, Warner Music would retain rights to Madonna's albums catalog dating back 20 years. /T. Amobi, CPA, CFA
S&P REITERATES BUY OPINION ON SHARES OF NORDSTROM INC.
September same-store sales rose 3.2%, below our projected 7.5% increase. We believe warm weather hurt sales in the Northeast, since Nordstrom's stores are fully invested in fall merchandise. Stronger sales reported in regions such as the Northwest, where we think temperatures were cooler, imply to us that fashions are on-trend. Given markdowns needed to reduce inventory, which was above-plan at the start of the October quarter, we are trimming our fiscal 2008 (Jan.) EPS estimate by 15 cents to $2.85. We are also lowering our 12-month target price by $5 to $55 on a revised peer-P/E valuation. /J. Asaeda
S&P INITIATES COVERAGE ON SHARES OF DISCOVER FINANCIAL WITH A HOLD OPINION
As the fourth-largest network and sixth-largest credit card issuer, we expect Discover to benefit from higher merchant acceptance. Discover has several acquiring agreements in place with firms that represent over 90% of the U.S. industry sales volume. We believe this will support growth in 2008. We expect continued losses in the company's U.K. business, on housing and credit related issues, but U.S. charge-offs were a solid 3.7% in August-quarter. We forecast EPS of $1.63 in fiscal 2007 (Nov.) and $1.78 in fiscal 2008. Our target price of $26, 14.6 times our fiscal 2008 estimate, represents a discount to peers. /F. Braden, CFA