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S&P Upgrades SAP to Buy

From Standard & Poor's Equity Research

SAP (SAP) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Zaineb Bokhari

SAP share prices have declined about 16% from their recent highs. Nonetheless, we expect the company to have above-average growth in its software revenues in 2006 and 2007, driven by gains in the small and mid-sized business segment. We also see growth ahead thanks to new products such as Duet, developed with Microsoft (MSFT). Based on recent exchange rates, our 2006 earnings per share (EPS) estimate rises 5 cents to $1.87 and our 2007 estimate rises by 5 cents to $2.21. Reflecting lower peer multiples, however, our 12-month target price falls $3 to $60, at a premium to peers based on our growth outlook.

3Com (COMS) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Ari Bensinger

While the China-based Huawei-3COM joint venture is experiencing strong sales momentum, we see significant challenges in 3Com's core switching market in the face of increasing competitive pressures. Operationally, we expect the new CEO, Scott Murray, to announce initiatives in the coming months that should help the company resize its bloated cost structure. Based largely on our sum-of-parts model, after applying a sales multiple that is at a 20% discount to peers to account for our view of 3Com's continued operating challenges, our 12-month target price remains $4.

CBOT Holdings (BOT) : Starts at 2 STARS (sell)

Analyst: Jason Willey

We believe this leading futures and options exchange has benefited from increased investor interest in derivative products for the purposes of hedging and speculation. While we expect further revenue growth and margin expansion, we believe CBOT Holdings's current valuation has benefited from recent industry consolidation and does not fully reflect its revenue concentration risk and margins below peers. We see 2006 earnings per share (EPS) of $2.62, growing to $3.31 in 2007. Our 12-month target price of $94 is based on a price-to-earnings of 28.3 times our 2007 EPS estimate, in line with peers.

Cosi (COSI) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: William Mack, CFA

Our upgrade is based on valuation. We believe Cosi's future growth is highly dependent on franchising efforts, which are still in a nascent stage. A recent discussion with management suggests to us the conviction level among contracted franchisees remains high. Significant follow-through by these franchise partners, to which we assign a low but material possibility, suggests the potential for significant upside in profitability. Our 12-month target price for the shares remains $7.50, based on a seven times multiple applied to our 2007 restaurant-level profit forecast of $35 million.

Nucor (NUE) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Leo Larkin

Our upgrade is based on valuation. News recently hit that Nucor, citing higher prices and production, increased its second quarter earnings per share (EPS) guidance to between $1.25 and $1.35 from prior guidance of $1.10 to $1.20. We have increased our 2006 EPS estimate to $4.75 from $4.64 based on the news. We believe Nucor is now undervalued, selling at less than 10 times our 2006 EPS estimate and 6.5 times its first quarter 2006 cash and cash equivalents per share. We see the company benefiting from market-share gains, consolidation and new steelmaking technology. Our 12-month target price remains at $61.

MDC Holdings (MDC) : Cuts to 1 STAR (strong sell) from 2 STARS (sell)

Analyst: William Mack, CFA

Although we still expect 2006 and 2007 EPS of $11.10 and $9.45 for MDC, incremental evidence of worsening new home demand reduces our confidence in even these recently lowered forecasts. Thus, we have moved toward an asset-based valuation model, focusing on stockholders' equity, for MDC. Our new 12-month target price is $44, reduced from $50.

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