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Hold Merck and Schering-Plough as FDA O.K.'s Zetia

Merck (MRK) and Schering-Plough (SGP): Maintains 3 STARS (hold)

Analyst: Herman Saftlas

The FDA approved the companies' Zetia cholesterol drug. Zetia works by blocking cholesterol absorption in the intestine, while conventional statins restrict cholesterol production in the liver. Combined Zetia/statin lowered LDL cholesterol by 25%, vs. 4% for placebo. Side effects are minimal. Despite a very competitive market, S&P sees the potential for over $1 billion annual sales of standalone Zetia, with profits shared by Merck and Schering-Plough. However, S&P isn't changing its estimates because of other issues facing these companies.

Cigna (CI): Maintains 2 STARS (avoid)

Analyst: Philip Seligman

Cigna sees 2003 earnings per share $6.25-$6.50 vs. 2002's $6.50-$6.75, partly on higher IT spending to improve service. Guidance looks optimistic, as rivals likely will take advantage of Cigna's turnaround and below-peers' service quality. Moreover, while its HMOs are performing well, a report in The Wall Street Journal suggests doctors may leave its provider networks due to software that cuts their bills to what it calculates to be a more appropriate payment. Cigna's potential to achieve its targeted debt-to-capital ratio in 2003 is also optimistic, given its plan to fund $715 million of its reinsurance obligation via free cash flow.

Kellogg (K): Reiterates 3 STARS (hold)

Analyst: Richard Joy

Kellogg reported third quarter earnings per share of $0.49 vs. $0.48 before special items -- a penny better than expected. Comparable sales gained 7%, with U.S. cereal segment up 6%, U.S. snacks up 5% and international up 6%. Gross margin widened 20 basis points on improved mix and cost synergies. Strong cash flow is funding continued debt reduction. S&P is keeping the 2002 and 2003 earnings per share estimates at $1.73 and $1.90, respectively. Sales momentum and price/mix improvements make shares worth holding at 18 times S&P's 2003 earnings per share estimate, a premium to the price-earnings multiples of the S&P 500 Index and comparable peers.

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