Wednesday May 14, 01:27 PM
S&P Picks and Pans: HP, EDS, Wal-Mart, Sirius Satellite, Staples, Toll Brothers
S&P REITERATES BUY OPINION ON SHARES OF HEWLETT-PACKARD (HPQ; 44.05):
HPQ agrees to acquire Electronic Data Systems (NYSE: EDS - news)
(EDS; 24.47) for an enterprise value of $13.9 billion, equal to $25 cash per EDS share. The deal, pending approvals, should close in second half 2008 and be non-GAAP accretive in fiscal year 2009 [October]. We think HPQ will be paying a premium, at about 18 times S&P's 2008 EPS estimate for EDS, but view favorably the strategic addition of EDS's services business. We see effective cost cuts improving longer-term profitability. Separately, HPQ posts preliminary April-quarter EPS of $0.87, $0.03 above our model, and we raise our fiscal year 2008 forecast $0.04 to $3.54. - T. Smith, CFA, C. Montevirgen
S&P REITERATES HOLD OPINION ON SHARES OF ELECTRONIC DATA SYSTEMS (EDS; 24.13):
EDS agrees to be acquired by Hewlett-Packard for $13.9 billion, or $25 a share cash. Deal is expected to close in the second half of 2008, pending approvals. We think it makes sense for EDS, which is struggling to compete with International Business Machines (IBM; 125.20) and Indian IT outsourcers. EDS has been trying to streamline cost structure in past years, including adding more offshore workers, cutting headcount in the U.S. and investing heavily in automation and standardization, in an attempt to widen margins. We are raising our target price by 5 to 25, in line with HPQ's offer. -D. Cathers
S&P REITERATES HOLD RECOMMENDATION ON SHARES OF WAL-MART STORES (WMT; 58.02):
WMT posts April-quarter EPS of $0.76, vs. $0.68, $0.01 ahead of our expectations. Operating margin expanded more than we expected, as inventory reductions led to reduced markdowns, increased productivity and lower shrink costs, despite higher energy costs. Although we are reducing our July-quarter EPS estimate by $0.02 to $0.81, in line with the company's $0.78-$0.81 guidance, we are keeping our fiscal year 2009 [January] forecast of $3.42, as we believe WMT will continue to take market share through its emphasis on low-priced offerings. Our 12-month target price of 58 is based on our DCF and p-e analyses. -J. Agnese
S&P MAINTAINS HOLD OPINION ON SHARES OF SIRIUS SATELLITE RADIO (SIRI; 2.84):
First quarter $0.07 loss, vs. $0.10 loss, is $0.01 narrower than our loss view, but matched Street's estimate. We note mixed key metrics in seasonally slow first quarter, with 332,500 net adds, were likely affected by pending XM (XMSR; 12.30) merger, subscriber acquisition costs per gross add of $91 and 2.7% [earlier story said 2.3%] churn. CEO affirmed merger optimism, but frustration by lack of FCC (Madrid: FCC.MC - news) decision was palpable. FCC approval may be imminent, but potentially onerous conditions and weak fundamentals make us wary of long-term synergies. Our target price is 3.50 on relative enterprise value/sales. -T. Amobi - CPA, CFA
S&P REITERATES BUY RECOMMENDATION ON SHARES OF STAPLES (SPLS) 22.28]:
SPLS has increased its hostile bid to acquire Dutch office goods supplier Corporate Express (CXP; 12.52) to 8.00 [$12.43] per share from earlier offer of 7.25. We continue to think this is a good strategic fit for SPLS, given expansion of geographic reach and likely cost efficiencies. SPLS has already obtained U.S. antitrust clearance, but will now need to receive 75% CXP shareholder approval. We do not think SPLS will further sweeten its offer, and expect CXP shareholders to vote in favor of the proposed transaction once a formal offer has been made. -M. Souers
S&P MAINTAINS BUY OPINION ON SHARES OF TOLL BROTHERS (TOL; 23.50):
TOL posts preliminary second quarter homebuilding revenues of $817 million, a 30% decline from a year ago but higher than our $740 million estimate. Contract backlog showed a 50% decline to $2.1 billion compared to a year ago's $4.2 billion and 15% lower than January-quarter's $2.4 billion. While we are concerned that the cancelled homes had an average selling price of $760,000, compared with new gross contracts coming in at $590,000, based on a shift in product mix, we believe TOL is weathering the downturn better than peers and it will gain share in the luxury segment with attractive property sites when housing recovers. -K. Leon-CPA
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