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S&P Says Buy Procter & Gamble

Procter & Gamble (PG) : Maintains 5 STARS (buy)

Analyst: Howard Choe

The FDA is likely to allow the over-the-counter sale (OTC) of Prilosec, the heartburn drug created by P&G and AstraZeneca. Selling Prilosec over the counter would allow the drug to compete against other antacids and acid reducers, but Prilosec would be the sole proton pump inhibitor sold over the counter. The drug could provide P&G with a 5% to 6% revenue boost for its fast growing healthcare segment. This opportunity underscores P&G's focus on high profit growth and its ability to leverage its vast distribution channels.

The prescription version will still be needed for Gastro-Esophageal Reflux Disease (GERD) and other serious indications. OTC Prilosec is expected to impact sales of rival OTC Pepcid from Merck, Protonix from Wyeth and a planned generic prescription Prilosec from Andrx.

Favorable trends continue; shares are attractive at 24 times S&P's fiscal 2003 (June) earnings per share estimate vs. 20 times for the S&P 500.

General Electric (GE): Maintains 3 STARS (hold)

Analyst: Robert Friedman

S&P views GE's pact to sell its Global eXchange unit as a tacit acknowledgement that it couldn't generate reasonable returns from big investments made in the electronic commerce business. S&P expects GE to book a $0.04 per-share gain from sale; however, S&P would strip these gains from GE's core income, as asset sale gains are generally not representative of the company's underlying business operations. Although GE shares are off more than 50% from 2000 highs, S&P believes there's still very little safety margin at current price levels.

Gemstar-TV Guide (GMST): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Howard Choe

In the early evening on June 21, the International Trade Commission ruled against Gemstar in its case against Echostar, Pioneer and Scientific Atlanta, citing that those companies' patents were not infringed. The judge also ruled that patent "121" has been misused and is not enforceable. Although the judge ruled that all three patents are valid, S&P believes this decision may erode Gemstar's leverage going forward in trials and customer negotiations. With a cloud hanging over stock, revenues in decline, and market risk aversion, S&P expects shares to underperform S&P 500.

Walgreen (WAG): Maintains 4 STARS (accumulate)

Analyst: Joseph Agnese

The discount retailer reported May quarter earnings per share of $0.25 vs. $0.21, in-line with S&P's estimate. Total sales rose 17.5% reflecting comparable store sales growth of 11.5% and expansion program progress. Prescription sales remain strong with comparable sales rising 16.7%, accounting for 61% of total sales. Margins are expected to be pressured by a change in product mix and a competitive promotional environment. Although shares are trading at 32 times S&P's fiscal 2003 (Aug.) EPS estimate of $1.18, as a clear industry leader Walgreen should benefit from long-term earnings consistency.

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