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S&P Reiterates Buy on FedEx

FedEx (FDX): Reiterate 5 STARS (buy)

Analyst: James Corridore

FedEx agrees to buy Parcel Direct, a package consolidator based in Wisconsin with about $130 million in annual revenues, for $120 million in cash. It says this purchase will help it with catalog and online retail customers, which we think will help close the gap it has in these areas compared with United Parcel Service (UPS). Given FedEx's history with acquisitions and the purchase price of under 1 times sales, we expect the deal will be quickly accretive, though not significantly given the small size of the transaction.

McDonald's (MCD): Keep 3 STARS (hold)

Analyst: Dennis Milton

July system-wide sales increased 11%, year to year, in line with our estimates, mainly on strong same-store sales gains and the positive translation impact of a weaker U.S. dollar. Same-store sales increased 7.8% in the U.S., 2.1% in Europe, and 8.3% in the Asia-Pacific/Middle East/Africa region. We are maintaining our 2004 earnings per share estimate of $1.72, our 2005 EPS estimate of $1.85, and our 12-month target price of $30. At 14 times our 2005 EPS estimate, in line with peers, we believe McDonald's shares are appropriately valued given long-term growth prospects for the company that we see as muted.

Hewlett-Packard (HPQ): Reiterate 4 STARS (accumulate)

Analyst: Megan Graham-Hackett

Hewlett-Packard offers to buy Synstar plc, a Britain-based IT services firm. The offer was made by Merrill Lynch on behalf of HP BV, a wholly-owned subsidiary of Hewlett-Packard. Based on press reports, the cash offer for Synstar was about $300 million. While we believe this planned acquisition fits with Hewlett-Packard's strategy to add to its services capabilities, we view the deal size as small. We maintain our fiscal year 2004 (October) EPS estimate of $1.43 and our S&P Core EPS estimate of $1.16, which reflects our stock option and pension expense projections. With the shares trading at price-to-sales ratio of 0.8, below the peer average, we view Hewlett-Packard as attractive.

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