S&P Downgrades AT&T Shares to Sell

AT&T (T) : Cuts to 2 STARS [sell] from 3 STARS [hold]

Analyst: Todd Rosenbluth

We believe the telecom giant AT&T is overpaying in its pending purchase of BellSouth (BLS) for 1.325 AT&T shares. We believe the regulatory approval process will be lengthy given the size of the deal. We see benefits for AT&T in owning all of the wireless service provider Cingular and leveraging its network in BellSouth territory. However, BellSouth was trading at an unwarranted premium to our target price, in our view, given the competitive and operational challenges we expect in 2006. In addition, AT&T is still in the early stages of integrating two large acquisitions that we think will pressure its margins. Our target price is $25.

Nortel Networks (NT) : Cuts to 2 STARS [sell] from 3 STARS [hold]

Analyst: Kenneth Leon, CPA

Given the proposed merger of telecom giants AT&T (T) and BellSouth (BLS) announced on Sunday, we believe Nortel is more at risk than other equipment suppliers. While dealing with trends of carrier consolidation around the globe, Nortel faces risks such as competition, price pressure and narrower margins. We believe Nortel is highly exposed to margin pressure with one of the highest sales mixes in the fixed-line and wireless carrier industry. Based on 16.7 times our 2007 earnings per share [EPS] estimate, near peers, we are lowering our target price to $2.50 from $3.50.

Lucent Technologies (LU) : Cuts to 2 STARS [sell] from 3 STARS [hold]

Analyst: Kenneth Leon, CPA

The proposed merger of telecom giants AT&T (T) and BellSouth (BLS) announced on Sunday poses more risk to Lucent than any other equipment supplier, given that it is the two carriers’ largest supplier. Lucent now faces challenges such as competition and price pressure. Lucent has a relatively high sales mix among fixed-line and wireless carriers. We are lowering our target price to $2.50 from $3, or 14 times our fiscal year 2007 [ending September] earnings per share [EPS] estimate, near peers.

D.R. Horton (DHI) : Cuts to 3 STARS [hold] from 4 STARS [buy]

Analyst: William Mack, CFA

We see mounting evidence of slower U.S. new home demand. As D.R. Horton is the largest builder in the country, we believe many of its operating regions are being impacted. Thus, we are lowering our fiscal year 2006 [ending September] earnings per share [EPS] estimate to $5.35 from $5.55. Our target price falls to $38 from $47. In line with D.R. Horton’s past premium of about 10%, this new valuation is above the average multiple we think its peers deserve, to reflect our view of D.R. Horton’s successful track record and its broad geographic diversity.

Ballard Power (BLDP) : Cuts to 2 STARS [sell] from 3 STARS [hold]

Analyst: Efraim Levy, CFA

We are raising our 2006 sales forecast to $66 million from the prior estimate of nearly $60 million, but are widening our loss per share estimate to 90 cents from 80 cents. We think higher gas prices could enhance interest in alternative fuel sources and in shares of companies such as Ballard Power, but we think lower prices would have opposite effect. We don’t expect Ballard Power to earn a profit or generate positive earnings before interest taxes depreciation and amortization [EBITDA] through at least 2009. Based on historical price-to-sales ratios, we derive a target price of $6.00, up from $5.00, for these high beta shares. But above our target price, sell Ballard Power shares.

AFLAC (AFL) : Ups to 4 STARS [buy] from 3 STARS [hold]

Analyst: Frank Braden

We see favorable sales trends resulting from increased advertising, higher agent count and an improving distribution network, both in the U.S. and Japan. With a high level of brand recognition as a result of the AFLAC Duck campaign, we believe AFLAC can now focus on defining its products. In our view, AFLAC’s high risk-based capital ratio will allow it to continue its consistent share repurchase and dividend programs. Our 2006 operating earnings per share [EPS] estimate remains $2.93; we are raising our target price by $3 to $53.