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S&P Says Accumulate Johnson & Johnson

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

Analyst: Robert Gold

Share price is weak Friday following Merrill Lynch's downgrade. In S&P's opinion, the company's growth rate will remain challenged by competitive pressures in the pharmaceutical segment, but the device group continues to support S&P's consolidated 10% top-line growth rate forecast for the second half of the year. S&P notes that J&J's financial resources would allow for a renewed acquisition strategy to drive incremental growth and expand the stock's valuation. S&P's discounted cash flow model pegs the intrinsic value at $49, while S&P's relative p-e forecast leads to a $60 12-month target price.

Cigna (CI): Reiterates 2 STARS (avoid)

Analyst: Phillip Seligman

Second-quarter operating earnings per share of $1.13 vs. $1.96 is 13 cents above S&P's estimate, but within Cigna's $1.00-$1.15 guidance. It still sees 2003 earnings per share of $5.00-$5.25. Despite turnaround moves, Cigna faces above-peer medical cost trends and intensifying competition, negatives that seem to have worsened, in S&P's view. On an estimated forward ratio of p-e to long-term growth at 1.1, Cigna is above peers' multiple of 1. Given underperformance and lack of a 2004 visibility, S&P thinks Cigna merits a below-peer ratio of 0.9, at best, suggesting a 12-month target price of $38 based on S&P's 2004 estimate of $5.30.

Affiliated Computer Services (ACS): Maintains 5 STARS (buy)

Analyst: Richard Stice

Affiliated Computer this morning announced a pact to sell most of its federal government business to Lockheed Martin for $658 million. It will retain the Dept. of Education student loan processing contract, and will concurrently acquire Lockheed's commercial information-technology business for $107 million. S&P views the deal as beneficial, enabling Affiliated Computer to unload its underperforming segment and focus its efforts on growing the business process outsourcing market. The calculation of S&P's $58 12-month target price compares Affiliated Computer's current p-e of 21 to its historical average of 26, and combines it with S&P's discounted cash flow analysis.

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