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S&P Keeps Strong Buy on Citigroup

Citigroup (C): Reiterates 5 STARS (strong buy)

Analyst: Mark Hebeka, CFA

Citigroup posts second-quarter earnings per share of 97 cents, vs. 22 cents a year ago, below our $1.05 estimate. Results were hurt by a difficult capital markets environment and a flattening yield curve. While second-quarter EPS was lower-than-expected, we believe this was mainly due to challenging market conditions. We see Citigroup as well diversified, with strong fundamentals, and we look for strong long-term growth. Our 2005 and 2006 operating EPS estimates fall to $4.17 and $4.60, respectively, from $4.30 and $4.75. With a dividend yield of 3.8%, we reiterate our strong buy opinion, on a total return basis. Our 12-month target price remains $57.

Guidant (GDT): Downgrading to 2 STARS (sell) from 3 STARS (hold)

Analyst: Robert Gold

Guidant notifies physicians of failure in some legacy pacemakers. Only 69 out of 78,000 adverse events have been found, but we see more due to the extended average implant age in U.S. patients. We think recent adverse events at Guidant raise the chance that the Johnson & Johnson (JNJ) deal, worth $74.60, will be revised or break. Our second-quarter EPS estimate falls by 5 cents, to 60 cents, and 2005's by 10 cents, to $2.55, on ICD recalls. Our target price falls by $12 to $62, assigning 50% to our $56 valuation of standalone Guidant and 50% to our $67-$69 value range on a potentially revised JNJ offer.

Whirlpool (WHR): Maintains 3 STARS (hold)

Analyst: Amy Glynn, CFA

On its conference call, Whirlpool discussed its buyout bid for Maytag, citing the opportunity to sizably reduce costs and reinvigorate Maytag brands as two primary reasons for the proposed deal. But it was reluctant to provide details such as targeted cost savings or expected accretion, pending completion of its due diligence. Given our view of Maytag's high-cost domestic manufacturing footprint, we are a bit concerned that Whirlpool may not be able to quickly improve Maytag's cost structure if the transaction goes through. If it moves ahead, we expect a definitive agreement by Aug. 19.

Maytag (MYG): Maintains 3 STARS (hold)

Analyst: Amy Glynn, CFA

The shares are up about 10% in pre-market trading after rival Whirlpool (WHR) proposes to acquire Maytag for $17 a share, a premium to both Ripplewood and Haier bids of $14 and $16, respectively. Last week, Maytag urged shareholders to vote "yes" to Ripplewood at the Aug. 19 shareholder meeting. Today, Maytag says its board has not changed its recommendation, but we expect Maytag to explore Whirlpool's bid. While difficult to forecast, our sense is that Ripplewood is not interested in raising its bid, but we think it's possibile that Haier might do so. We expect to see a resolution by August.

Apple Computer (AAPL): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Today's Wall Street Journal reported that Apple may introduce an iPod optimized for videos by September, 2005. We believe the evolution of the iPod as a platform for video content was largely expected, and market speculation, we believe, started with the introduction of a color screen on the iPods last year. We note that music videos are already available with iTunes service. We believe that like the music service, Apple will make money from device sales vs. content sales. We see Apple, which trades above peers on price-to-sales basis, as fairly valued given our view of its strong cash levels and iPod leverage.

Intel (INTC): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Ahead of second-quarter results on July 19, we see Intel's earnings per share of 31 cents for the quarter on sales of $9.2 billion and gross margin of 57%. For full year 2005, we see EPS of $1.47 on 15% sales growth and gross margin of 60%. We believe Intel continues to benefit from strong notebook demand, and we see notebook momentum continuing into the second half. In addition, we see gross margin widening to 60% in the third quarter and 62% in the fourth quarter on the strength of lower factory startup costs, lower production costs per chip, and an improved product mix. Our 12-month target price remains $30, based on our p-e and price-to-sales analyses.

3M (MMM): Reiterates 3 STARS (hold)

Analyst: Anthony Fiore, CFA

Second-quarter earnings per share of $1.00, after previously announced one-time charge, vs. 97 cents, is 2 cents above our estimate. Operating margin expanded to a record 24.2%, despite a weaker performance in 3M's high-margin display and graphics business than we expected. We think the softness reflects an increasingly competitive environment for display enhancement films. Looking ahead, we think 3M will remain committed to improving the efficiency of its manufacturing operations, including its focus on Six Sigma and global sourcing. Our 2005 EPS estimate remains at $4.10 and our 12-month target price at $80.

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