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S&P Cuts Martha Stewart Living to Hold

Martha Stewart Living (MSO): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: William Mack, CFA

Our downgrade reflects valuation, as the stock approaches our recently raised 12-month target price of $12. Because we believe our investment thesis remains intact, we maintain this target price, which is based on a sum-of-parts methodology. The valuation we ascribe to the stock continues to be guided by our beliefs that contributions from its publishing, TV, and direct-to-consumer units will shrink through 2005, but that most of its value derives from the profits we see at its merchandising division. We would hold positions in the shares.

EarthLink (ELNK): Reiterates 5 STARS (buy)

Analyst: Scott Kessler

EarthLink announced that its Board of Directors approved a 10b-5 plan by which the company's president and CEO, Gary Betty, could sell up to 72,000 shares between September 1, 2004, and August 31, 2005. Sales would be on a monthly basis and subject to Earthlink's share price. As of August 27, 2004, Betty owned securities constituting some 1.9 million shares. Thus, if Betty maximized his sales, he would still retain 96% of his current holdings. We think any weakness in the stock on this news would amount to an enhanced buying opportunity. Our 12-month target price remains $13, based on

discounted cash-flow (DCF) analysis.

Repsol YPF (REP): Reiterates 3 STARS (hold)

Analyst: Tina Vital

Repsol holds large and relatively low cost reserves in Latin America, and strong refining operations in Spain and Argentina. We expect a 4% increase in upstream volumes and high oil prices to boost EBITDA 10% in 2004. We are raising our 2004 earnings per American Depositary Share estimate by 19 cents to $2.48 and our 2005 projection by 4 cents to $2.17. But we see the ADS price pressured by Latin American political and operational problems and negative foreign exchange conditions. Our DCF and peer valuations lead us cut our target price by $1 to $22 per ADS, or 10 times our 2005 earnings per ADS estimate, a slight discount to peers. With the shares carrying a dividend yield near 2%, we would hold Repsol.

Coherent (COHR): Reiterates 4 STARS (accumulate)

Analyst: Markos Kaminis

We are lowering our revenue forecast for fiscal 2005 (ending September), as we believe consumer spending may be pressured by rising interest rates. We are raising our EPS estimate for fiscal 2004 to 41 cents from 39 cents, but we are lowering our fiscal 2005 EPS estimate to $1.05 from $1.20. Based on our discounted free cash flow analysis, applying a weighted average cost of capital of 10.9%, we are reducing our 12-month target price to $31 from $34. However, comparable analysis supports our view that the shares are undervalued, as they trade at a discount to peer price-to-sales and price-to-book multiples by our calculation.

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