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S&P Says Hold PalmOne

PalmOne (PLMO): Maintains 3 STARS (hold)

Analyst: Megan Graham-Hackett

PalmOne posted February-quarter pro forma earnings per share of 1 cent, beating S&P's 39 cents loss estimate, as revenues, gross margin, and expense controls were better than S&P expected. Revenues rose 23% on strong Treo sales, and handhelds benefited from new models and higher Web sales, boosting gross margin to 200 basis points above S&P's model. The company sees May-quarter revenues of $245 million to $255 million. S&P is narrowing the fiscal 2004 (May) loss estimate to 36 cents, from $1.11. Although PalmOne is trading at a discount to peers on a price-sales basis, based on S&P's view of inconsistent execution in the past and declining core handheld sales, S&P would hold.

Applied Materials (AMAT): Maintains 3 STARS (hold)

Analyst: Colin McArdle

Based on a slightly lower, though healthy, February book-to-bill ratio of 1.14, vs. 1.19 in January, as published by the Semiconductor Equipment and Materials International (SEMI) on Mar. 19, S&P remains neutral on the semiconductor equipment industry. Valuations appear to be fully anticipating S&P's belief that second-quarter bookings will likely be flat sequentially. Longer term, S&P believes fundamentals are intact for solid earnings growth based upon increased corporate information-technology spending trends. S&P looks to first-quarter earnings comments for additional evidence that the cyclical turnaround is unfolding.

Willis Group (WSH): Initiates coverage with 4 STARS (accumulate)

Analyst: Susan Dawkins

Willis provides risk-management consulting and insurance brokerage services. Given its aggressive sales culture, solid business model, strong positioning, and global reach, S&P thinks Willis is primed to take market share, particularly in North American insurance brokerage. S&P estimates cash earnings per share of $2.70 in 2004, boosted by mid-teens revenue growth and moderate efficiency gains. After a recent refinancing, Willis's balance sheet looks solid. S&P thinks the shares should trade at premium to the peer group, based on S&P's view of execution, ability to win new business, and cost-effective expansion plans. S&P's target price is $44, or about 16 times S&P's 2004 earnings per share estimate.

Pfizer (PFE): Maintains 5 STARS (buy); Eli Lilly (LLY) and Merck & Co. (MRK): Maintains 4 STARS (accumulate)

Analyst: Herman Saftlas

Big pharma stocks, under pressure for the past six weeks, weakened further in today's general market selloff. Investors remain cautious on the group with the resurfacing of the reimportation issue, and fears that John Kerry will win November's presidential election. Today's news of suicide risks with antidepressant drugs also didn't help. However, S&P doesn't recommend bailing out at current depressed levels as the group's

price-earnings ratios are near historic lows. The companies also have generous dividend yields.

Nortel Networks (NT): Maintains 3 STARS (hold)

Analyst: Kenneth Leon, CPA

Today, Nortel was selected by Eurotel, a Czech wireless carrier, to build a 3G network with CDMA2000 1xEV-DO in the 450 MHz radio spectrum. Nortel says deployment should be completed by the second quarter of 2004. The company has many trials under way in Eastern Europe and Russia, testing 3G networks in the 450 MHz range. S&P sees this as a market opportunity for suppliers to help carriers upgrade systems to 3G, with the radio spectrum held by the former Soviet Union. S&P believes that Qualcomm will benefit the most in the newly expanded 3G chipset and license royalty sales.

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