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S&P Says Buy Procter & Gamble

Procter & Gamble (PG): Reiterates 5 STARS (buy)

Analyst: Howard Choe

P&G posted Sept.-quarter earnings per share of 73 cents, vs. 63 cents, 1-cent higher than our estimate. Organic sales and volume growth were better than we expected, up 6% and 8%, respectively. Volume growth was led by beauty care, fabric and home care segments, and developing markets. Procter & Gamble's outlook for fiscal 2005 (ended June) is in line with our estimates, at the high end of the company's long-term targets. We are raising our fiscal 2005 earnings-per-share estimate to $2.60 from $2.59. Our 12-month target price is $65. Given Procter & Gamble's strong sales momentum, and a diversified portfolio of mega brands, we view the company as undervalued, trading only in line with peers.

Comcast (CMCSA): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

The company posted third-quarter earnings per share of 10 cents, vs. a 7-cent loss, in line with our estimates and a penny below the Street. Modest basic additions were in line, but digital and high-speed data were well above expectations, with the former reflecting the rollout of video on-demand (VOD), high-definition television (HDTV), and digital video recorders (DVRs), and the latter marking an all-time quarterly record. The company affirms 2004 cable division targets for 10% revenue and 18% EBITDA growth, with flat basic subscribers, about 1 million digital additions, 1.6 million to 1.7 million data additions, up to 100,000 circuit-switched phone customer losses, and $2 billion of consolidated free cash flow.

Caesars Entertainment (CZR): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Tom Graves, CFA

We still do not expect much upside for Caesars's shareholders from Harrah's Entertainment's (HET) pending stock-and-cash acquisition, which we expect to be completed around mid-2005, assuming necessary approvals. However, we currently value the deal at about $18.30 per Caesars share, and the value could move higher if Harrah's shares appreciate further. As a result, we are raising our 12-month target price for Caesars shares to $18 from $17. Meanwhile, before special items, but including operating results of two properties that we expect Caesars to divest, we estimate Caesars 2004 earnings per share at 73 cents.

PepsiAmericas (PAS): Maintains 3 STARS (hold)

Analyst: Richard Joy

PepsiAmericas reported third-quarter earnings per share, before special items, of 42 cents, vs. 39 cents, in line with our estimate. Sales rose 2.1%, as a 5.5% volume drop was outweighed by 7.1% higher pricing. Volumes fell 4.1% in the U.S., and dropped 16% in Central Europe, but gained 9.5% in the Caribbean. While we see some improvement in volume trends in fourth-quarter, we think raw material costs should continue to impact results. We are keeping our 2004 and 2005 earnings-per-share estimates at $1.20 and $1.31, respectively. We think the potential for improving operating trends and returns make shares worth holding. Our 12-month target price is $21.

Northrop Grumman (NOC): Reiterates 1 STAR (sell)

Analyst: Robert Friedman, Leo Larkin

Northrop Grumman posted third-quarter earnings per share of 80 cents, vs. 58 cents on an 11% sales gain, slightly beating our 75 cents estimate. Sales rose in all units, with the largest gains occurring in ships, mission systems and integrated systems. Margin improvement accounted for most of the rise in earnings per share, but some of the expansion was the result of lower pension expense. We are keeping our 2005 estimate at $3.25. Our outlook remains unchanged on our long-term concerns about business demand and issues relating to quality of earnings per share. Our 12-month target price remains $40, based on our discounted cash flow analysis.

Avaya (AV): Reiterates 5 STARS (buy)

Analyst: Ari Bensinger

Before special items, Avaya posted Sept-quarter earnings per share of 19 cents, vs. 3 cents, a penny below our 20 cents estimate. A higher-than-expected tax rate hurt results by about 2 cents. Both sales and operating margins were above our projections. We expect accelerating demand for IP telephony to fuel solid sales growth throughout 2005. However, based on potential tax asset allowance deferrals, we are lowering our fiscal 2005 (Sept.) earnings-per-share estimate to 85 cents from 89 cents. Based largely on a group-average p-e ratio, we are cutting our 12-month target price to $19 from $22.

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