S&P Cuts Outlook on Web Software Stocks

Plus: Analysts downgrade Alcan and MGM Mirage; and comment on how a la carte programming could hurt cable and DBS outfits

Internet Software & Services Stocks: Cuts Sub-Industry Outlook To Neutral From Positive
Analyst: Scott Kessler

Following our Nov. 23 downgrade of Yahoo (YHOO ) equity to hold from buy based on valuation, we are lowering our outlook on the Internet Software & Services sub-industry to neutral from positive. Yahoo is by far the largest component of this S&P 1500 sub-industry. We continue to forecast U.S. online advertising revenue growth of 28% in 2005 and 24% in 2006, reflecting increasing online usage and greater corporate Web marketing activity. We continue to recommend three stocks in the sub-industry : RealNetworks (RNWK ), VeriSign (VRSN ), and WebEx (WEBX ).

Comcast (RNWK ) and other multichannel TV programming providers
Analyst: Tuna Amobi, CPA, CFA

S&P thinks a la carte programming could hurt multichannel TV providers. An unconfirmed Wall Street Journal report says an FCC report could endorse a la carte offering and tiered pricing of video programming channels, as FCC Chairman Martin appears at a Senate forum today. We are surprised by timing of an apparent regulatory shift, as the FCC and Congress have wrestled with this controversial issue in recent years, amid concerns with media indecency. While we see possibility of high-priced sports tiers, we think a blanket a la carte regime could imperil long-term business models for multichannel distributors and programmers, potentially creating new worry for cable and DBS investors.

MGM Mirage (MGM ) : Cuts to 2 STARS (sell) from 3 STARS (hold)
Analyst: Thomas Graves, CFA

Based on our more cautious view, we are lowering our 2006 earnings per share estimate to $1.84 from $1.95, which includes 12 cents of projected option expense. MGM stock is trading at about a 45% price-to-earnings premium to the S&P 500, among other things. We see the company's strong Las Vegas presence and diverse growth prospects amply represented in the stock price. We are lowering our target price to $37 from $45.

Alcan (AL ) : Cuts to 3 STARS (hold) from 4 STARS (buy)
Analyst: Leo Larkin

Our downgrade is based on valuation. We estimate earnings per share of $2.28 in 2005 and $2.80 in 2006, assuming a higher aluminum price in 2006 than in 205. Our longer-term fundamental outlook of Alcan is positive, as we see the company benefiting from ongoing consolidation in the aluminum industry. In our view, the concentration of production in the hands of fewer companies should result in better pricing discipline and less volatile earnings per share over the course of the business cycle. But, with just 7.7% upside to our 12-month target price of $42, we would not add to positions.

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report.
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