McDonald's (MCD ): Maintains 3 STARS (hold)

Analyst: Dennis Milton

The world's No. 1 burger chain announced the resignation of chairman and CEO Jack Greenberg, and his replacement by vice chairman and president Jim Cantalupo. The moves come amid recent speculation that Greenberg might be replaced given the company's disappointing earnings over the past several years. Erasing management uncertainty could positively affect the stock in the near-term; but, while S&P believes the shares are undervalued at less than nine times the 2002 free-cash flow, S&P wouldn't add to positions in the absence of more positive same-store sales trends.

Overture Services (OVER ): Reiterates 5 STARS (buy)

Analyst: Scott Kessler, Jonathan Rudy

Shares are up Thursday on the news that CNN has chosen online search engine Overture to be its exclusive search provider for its three primary Internet properties. Additionally, S&P announced that Overture will be added to the S&P MidCap 400 Index after the close of trading on Friday. The deal with CNN should be quite positive for Overture, because of the heavy Internet traffic that visits the various CNN sites. With attractive valuation relative to its peer group, and a strong balance sheet with no debt, S&P would continue to buy Overture.

IDEC Pharmaceuticals (IDPH ): Adding to Top Ten Portfolio

Analyst: Robert Gold

In order to reflect S&P's more conservative stance on homebuilders, S&P is removing Hovnanian Enterprises from S&P's Top Ten Portfolio and replacing it with IDEC, a leading developer of therapeutics for cancer and autoimmune diseases. Ranking among the select few profitable biotech firms, S&P sees IDEC as posting 2002 earnings per share of 84 cents and 2003 earnings per share of $1.16. Based on S&P's net present valuation of IDEC's products and pipeline, S&P feels the shares are worth $45-$50. S&P ranks the shares as 5 STARS (buy).

Merck (MRK ): Maintains 3 STARS (hold)

Analyst: Herman Saftlas

Merck raised its 2003 earnings per share guidance to $3.40-$3.47. The company sees double-digit earnings gain in its core pharmaceutical business, and 20%-25% net income rise at its low-margin Medco pharma benefits management unit. The implied 2003 earnings per share growth rate from 2002 consensus is 8%-11%. S&P sees decent sales growth for Fosamax, Cozaar and Singular lines, offset by sluggishness in Zocor and Vioxx. Other income lines will likely be hurt by generic Prilosec and a negative return from Merck's Zetia pact with Schering- Plough. Merck's pipeline is still relatively thin, and S&P says shares are adequately valued, at about average to the big pharmaceutical group's 2003 price-earnings multiple.

Synopsys (SNPS ): Reiterates 4 STARS (accumulate)

Analyst: Richard Tortoriello

Synopsy posted October quarter earnings per share of 96 cents before goodwill and acquisition-related charges, vs. 39 cents -- three cents above the Street's estimates. Sales rose 69%, aided by the Avant! acquisition. Synopsys now has a strong end-to-end design portfolio, and is likely to gain share. S&P is adjusting the fiscal 2003 (Oct.) earnings per share estimate to $2.97 from $3.21, vs. the company's guidance of $3.25, to reflect slower January growth. However, S&P sees initial signs that chipmakers are increasing design work, and views Synopsys as attractive at a price-earnings-to-growth ratio of 0.8, vs. 0.9 for the S&P Midcap 400.

KB Home (KBH ): Downgrades to 4 STARS (accumulate) from 5 STARS (buy);

D.R. Horton (DHI ) and Hovnanian Enterprises (HOV ): Downgrading to 3 STARS (hold) from 5 STARS (buy); Lennar (LEN ): Maintains 5 STARS (buy).

With a better economy likely to bring slightly higher mortgage rates over the course of 2003, S&P's enthusiasm for building shares is diminishing. A muted reaction on Wednesday to good November orders for several big builders shows it's getting tough to find a catalyst for shares. Valuations are very modest and S&P expects decent 2003 results, but the cycle peak is likely nearing.

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