Sun Shares Shine on Takeover Bid

Merger talk was radiant news for investors in beleaguered Sun Microsystems (JAVA), whose shares shot up as much as 70% Wednesday after reports IBM (IBM) was considering a $6.5 billion takeover.

Should the transaction go forward, it would represent a 100% premium to Sun s Tuesday closing price and it would signal a realignment for Big Blue. In recent years IBM has moved away from hardware to higher margin software and services businesses.

The deal is a shot in the arm for the technology sector, which has been hard hit by reduced corporate spending during the economic downturn. Sun reported a loss of $209 million during its last quarter. Shares had been trading near a 52-week low before the deal was announced.

First Global analyst Amitabh Goel earlier this month predicted IBM would make such a move. Amidst the ongoing downturn, he said, "IBM is aggressively looking at acquiring smaller companies in order to take advantage of their low valuations. But, Goel thought any deal would come in the software sector.

Christopher Hickey, an analyst at Atlantic Equities, says cash-rich IBM would have little trouble actually pulling off the merger if it s approved by antitrust regulators, but added that it s probably more tactical than strategic. He says IBM may be more concerned with denying competitors the benefits of owning Sun than it is in making a major shift back to hardware. IBM would be able to justify this as a cross-selling acquisition and would want to move Sun s client base to its own hardware, he says.

Bottom Line: Hold
The path to a successful takeover has many potential pitfalls.

Investors Dine Out on Darden

Investors scooped up the shares of Darden Restaurants (DRI) Wednesday after the company beat Wall Street estimates during its fiscal third quarter and forecast higher earnings going forward.

The Orlando-based operator of the Olive Garden, Red Lobster and LongHorn Steakhouse chains reported earnings of 78 cents a share, ahead of the Street consensus estimate of 68 cents a share. It also said it expected fiscal 2009 earnings to rise 1% to 4% on revenue growth of 9% to 9.5%. It earned $2.74 a share in fiscal 2008.

Although Darden saw same store sales decline in the last quarter, with a company-wide slide of 3.2%, it held up better than its peers as a result of firm cost controls, MKM Partners analyst Stephen Anderson wrote Wednesday. Olive Garden's same-store sales dropped 1.4%, while Red Lobster had a 4.6% decrease and LongHorn declined 5.4%. Oppenheimer & Co. analyst Matthew DiFrisco said marketing efforts helped Darden stay ahead of other sit-down restaurant groups, which had an average same-store sales decline of 6% in the quarter.

Anderson raised his rating on the stock to Buy from Neutral, writing that we are becoming more convinced that the company will emerge from the recession stronger than its peers.

Bottom Line: Hold
This stock s rebound reflects the company s ability to navigate stormy conditions, but significant growth probably won t be served up any time soon.

Cereal Killing

General Mills (GIS) shares fell Wednesday after the food company raised guidance for its fiscal year, but not enough to satisfy Wall Street estimates. It also missed earnings estimates for its fiscal third quarter.

The Minneapolis-based conglomerate reported operating earnings of 85 cents a share, down from $1.27 a share a year ago and short of Street forecasts of 88 cents a share. General Mills now expects to earn between $3.87 and $3.89 a share for fiscal 2009, CEO Ken Powell said on a Wednesday conference call. Street estimates averaged $3.94 a share.

That represents double-digit EPS growth in a very challenging environment, and we see this as a solid base to build on in fiscal 2010, Powell said, adding that a calendar quirk will add a week of sales to the fiscal year. As we look ahead to the fourth quarter, the 53rd week will contribute to our sales and EPS growth.

Other food names, including Kraft Foods (KFT), have recently endured selloffs, too, as investors looking for routes to a recovery may be shunning the defensive, counter-cyclical aspects of these companies as they seek higher growth names.

The biggest disappointment here is the sizable miss for Q3, says Soleil Securities analyst Ed Roesch. I think expectations were still that the full year would have more upside versus this guidance. It s a pretty unforgiving market now.

Bottom Line: Hold
Today s move is overselling, and this isn t a company to own for big jumps.