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Still Accumulate J&J

Johnson & Johnson (JNJ): Maintains 4 STARS (accumulate)

Analysts: Robert Gold, Herman Saftlas

An FDA advisory panel granted unanimous approval to J&J's Rapamune-coated coronary stent. While the recommendation was anticipated and paves the way for a 2003 U.S. launch, the timing is a bit clouded by cautious statements from the panel. Specifically, it expressed concerns over dosage and some aspects of trial design. There may also be minor manufacturing issues at hand, and constrained supplies of Rapamune from Wyeth could impact the rollout. But, we believe the new product will be an important component of J&J's growth in 2003 and beyond.

Freddie Mac (FRE): Maintains 4 STARS (accumulate)

Analyst: Erik Eisenstein

Freddie posted Q3 EPS, excluding effects of accounting regulation SFAS 133, of $1.34, vs. $1.08 one year earlier, well above expectations. Freddie seemed to grow its retained portfolio more than expected in Q3. While this might be worrisome from an interest rate risk perspective, Freddie's net interest yield narrowed only 1 basis point from Q2 and its duration gap remained narrow. Based on these results, we are raising our 2002 EPS estimate to $5.17, from $4.99, and 2003's to $5.79, from $5.70. Freddie remains attractive at about 10 times the 2003 estimate.

MGM Mirage (MGG): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Thomas Graves

Before special items, the company reported Q3 EPS of $0.51, vs. $0.19, above estimates. We're adjusting our full-year 2002 estimate up to $2.00 from $1.95, and lowering our 2003 forecast to $2.20 from $2.30, largely on a change in capitalized interest. In 2003, we expect uses of free cash flow to include debt repayment and stock repurchase. With the stock down about 19% since early October, it's now at a below-market p-e multiple. We expect multiples to expand as investors focus on cash flow and the expected debut of MGM Grand's Atlantic City joint venture casino-hotel in 2003.

Xerox (XRX): Reiterates 2 STARS (avoid)

Analyst: Richard Stice

Xerox posted Q3 EPS of $0.05, vs. a loss of $0.05, $0.01 above our estimate. Revenues were down 6% on end-market weakness. Gross margin widened on improved productivity and business mix. We are raising our 2002 EPS estimate by $0.05, to $0.22, and our 2003 forecast by $0.10, to $0.58. But earnings quality remains a concern. With over 80% of 2001 outstanding options under water, repricing dilution is possible. Also, Xerox expects to book a Q4 non-cash charge to account for underfunded pensions. Even though the shares are trading at a discount to the broader market, we advise placing funds elsewhere.

KLA-Tencor (KLAC): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Richard Tortoriello

The chipmaker posted September quarter earnings per share of $0.26 vs. $0.44, $0.03 above the Street's mean. Sales fell 25%, but rose 1% from the June quarter. Orders dropped 37% sequentially, partly on a large push-out, and guidance for the December quarter is flat. The orders miss was a surprise, with KLA bettering earlier than peers because of a higher need for defect inspection. S&P is cutting the fiscal 2003 (June) earnings per share estimate to $0.79 from $1.31, and cutting fiscal 2004's to $1.38 from $1.85. KLA sells at a premium to the group at 3.9 times sales and three times the book value; S&P says the shares should sell more in line with Novellus at two times the book value.

P.F. Chang's China Bistro (PFCB): Maintains 5 STARS (buy)

Analyst: Markos Kaminis

P.F. Chang's posted third quarter earnings per share of $0.17 vs. $0.14, in line. Revenue climbed 33%, as previously reported. Net margin narrowed 30 basis points on higher labor costs, and expenses associated with the rollout of Pei Wei. P.F. Chang's raised the 2002 earnings per share guidance to $0.80, in line with the forecast. In 2003, P.F. Chang's sees $1.02; S&P views $1.04 as more likely. At 33 times the estimate, P.F. Chang's is modestly valued to the 30% growth seen. After reviewing the discount cash flow model, with larger cash flows pushed forward, S&P is raising the 12-month target to $37-$39 from $36-$38.

Moody's Corp. (MCO): Maintains 5 STARS (buy)#

Analyst: William Donald

As third quarter earnings per share beat consensus by 10%: Moody's posted third quarter earnings per share up 39% to $0.43. The Street's consensus was $0.39. Revenues advanced 30%, including a 23% gain in the U.S. and a 49% surge in international. Despite of slowing demand for U.S. corporate issuances, Moody's expects to see continued strong growth in global structured finance, U.S. public finance, and global research and risk management services. It sees double-digit earnings per share growth in 2003 in spite of slower revenue gains. S&P has raised the 2002 estimate by $0.02 to $1.84, and raised 2003's by $0.02 to $2.10.

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