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S&P Lowers AIG to Sell

American International Group (AIG): Downgrading to 2 STARS (sell) from 3 STARS (hold)

Analyst: Catherine Seifert

We regard today's news that AIG terminated two employees, including its former CFO, for failing to cooperate with the SEC and attorney general investigations, as a major negative. We believe this turn of events could prolong the investigations and continue to pressure AIG shares. At current levels, AIG trades at 2 times our estimate of year-end tangible book value of $28, compared with 1.6 times to 1.8 times for many of its peers. We are lowering our 12-month target price to $54 from $72, which assumes that the shares lose some of their premium valuation vs. peers.

McCormick & Company (MKC): Maintain 4 STARS (buy)

Analyst: Richard Joy

Before special items, February-quarter earnings per share of 27 cents, vs. 27 cents a year ago, is 2 cents below our estimate, limited by high vanilla costs and European industrial weakness. Sales rose 5% on 3% higher volume/price mix and 2% forex gain. We expect solid gross margin improvement in the second half of fiscal year 2005 (ending November) on lower vanilla costs and efficiency savings. Given the February-quarter EPS shortfall and carryover of vanilla costs into the May quarter, we are reducing our fiscal 2005 estimate by 3 cents, to $1.72. We view MKC shares as attractive, based on our view of its dominant market shares and rising cash flows. Our target price remains $40.

Retek, Inc. (RETK): Reiterates 3 STARS (hold)

Analyst: Richard Stice, CFA

This morning, Retek agreed to be acquired by Oracle (ORCL) in a cash tender offer of $11.25 per share pending approvals, following SAP AG's (SAP) decision to remove itself from the bidding process. SAP's last offer was $11 per share. The deal is valued at approximately $630 million. We expect the product integration to be a relatively efficient process, as the bulk of Retek's customers already run applications on Oracle's database. We advise holding existing positions as we anticipate Retek's shares trading at or near Oracle's offer until the agreement closes.

Hewlett-Packard (HPQ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Hewlett-Packard announced plans to acquire online photo services firm Snapfish for an undisclosed amount. Snapfish has more than 13 million members and we believe was targeted by Hewlett-Packard to help emphasize the company's product differentiation from peers through the growing use of digital photography. We continue to believe that digital photography is the best opportunity for Hewlett-Packard to derive synergies between its printer and PC businesses. No change to our fiscal 2005 (ending October) earnings per share estimate of $1.53. With shares trading at profits per share of 0.7 times and below peer average, we view the stock as worth holding.

Wyeth (WYE): Reiterates 3 STARS (hold)

Analyst: Herman Saftlas

Wyeth announced first-quarter earnings per share guidance in the mid-to-upper 70 cents range or higher, vs. our 68 cents estimate and Street consensus of 67 cents, partly reflecting better-than-expected foreign exchange. While the company noted third-quarter earnings per share may be below consensus, we are raising our 2005 earnings per share estimate by 8 cents to $2.83 and our 2006 forecast by 10 cents to $3.00 given the strong first-quarter. While we like Wyeth's research and development pipeline, we remain concerned over its still uncapped diet drug liability and patent expirations over the next four years. Our 12-month target price stays at $44, based on our revised forward p-e and discounted-cash-flow assumptions.

Electronic Arts (ERTS): Reiterates 3 STARS (hold)

Analyst: Jonathan Rudy, CFA

Electronic Arts expects revenues for fiscal 2005 (ending March) of $3.100 billion to $3.125 billion, below our estimate of $3.204 billion, and sees operating earnings per share of $1.70 to $1.72, below our estimate of $1.95. It cites impact of hardware console shortage, notably on PS2 titles, and weak sales of its December-quarter releases. We are lowering our fiscal 2005 and fiscal 2006 operating earnings per share estimates to $1.72 and $1.74, from $1.95 and $2.10. Despite the disappointing news, what we see as a strong balance sheet and the best brand library in the industry causes us to hold Electronic Arts shares. We are cutting our target price to $64 from $72 on the lower forecasts.

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