S&P Upgrades BJ's Wholesale

Also: analysts' opinions on Cytyc, Caterpillar, AT&T, Hovnanian, Lockheed Martin, and Qualcomm

BJ's Wholesale Club (BJ ): Upgrading to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Jason Asaeda

January-quarter operating EPS of 68 cents, vs. 71 cents a year ago, beat our estimate by 3 cents, reflecting store pre-opening costs that were lower than we expected. Since we look for modestly improved fiscal year 2005 (ending January) operating margin, reflecting BJ's focus on better price management, increased penetration of private-label offerings, and well-controlled expenses, we are increasing our fiscal year 2005 operating EPS estimate by 9 cents, to $1.60. We find the shares attractive at 16 times this estimate, below its peers. We are raising our target price to $30, from $26, applying a historical average forward p-e of 19 to our fiscal 2005 EPS estimate.

Cytyc (CYTC ): Upgrading to 5 STARS (buy) from 3 STARS (hold)

Analyst: Robert Gold

Cytyc agrees to buy privately-held Novacept Inc. for $325 million in cash (pending approvals), which we think would provide much-needed revenue opportunity. We believe Novacept's FDA-approved NovaSure system for treating excessive menstrual bleeding, in our opinion a $1 billion market opportunity, is a natural fit into Cytyc's existing product line, which should help the integration process. We think Cytyc's targeted 3 cents EPS accretion in 2005 is conservative and believe 2005 estimates could rise by up to 15 cents under reasonable sales and margin scenarios. We are boosting our target price to $27 from $19.

Caterpillar (CAT ): Maintain 2 STARS (avoid)

Analyst: James Sanders

New CEO Jim Owens addressed analysts today regarding Caterpillar's long-term strategy. As expected, he reaffirmed its $30 billion sales goal with a 8.8% net margin by 2010. We believe that the combination of new engine technology, growth in emerging markets such as China, India, and Russia, and continued organic growth in existing geographic regions make these goals attainable. However, we continue to believe that these positive prospects are more than reflected in the price of the stock. We are maintaining our 12-month target price of $66, based on discounted cash flow.

AT&T (T ): Upgrading to 5 STARS (buy) from 3 STARS (hold)

Analyst: Todd Rosenbluth

We think AT&T's fundamentals will exhibit signs of stability, and we expect benefits from an increased presence in the local market, which offers access to a larger share of consumers' wallets. We see the VoIP service rollout helping to control the cost structure, and we view recent debt reduction and strong cash balance as additional catalysts. Trading well below peers on a p-e and enterprise value-to-EBITDA basis, we believe the shares discount AT&T's positive developments. We are raising our 12-month target price to $25, from $22. Combined with a 5% dividend yield, we would buy the shares.

Hovnanian (HOV ): Keep 4 STARS (accumulate)

Analyst: Michael Jaffe

Hovnanian posted January-quarter earnings per share of $1.74, vs. $1.35, 1 cent below our forecast. Adverse weather delayed construction in several markets but demand is still very strong, with orders up 52% (46% on a unit basis). The company brought a 59% rise in backlog (66% in units) to $1.7 billion (6,436). We are raising our fiscal year 2004 (ending October) EPS estimate to $9.60 from $9.30 and fiscal 2005 to $10.70 from $10.65. At 9 times our fiscal 2004 forecast, Hovnanian stock is in line with peers. But, based on our view that mortgage rates will stay low through 2006, we see p-e multiples expanding. Using relative valuation, our 12-month target price is $116.

Lockheed Martin (LMT ): Keep 1 STAR (sell)

Analyst: Robert Friedman, CPA

As our sell opinion is primarily predicated on our view of Lockheed's lofty stock price and mediocre business fundamentals, we advise investors not to put much stock in Bob Steven's ascension to CEO of the world's largest defense contractor. Mr. Stevens, in our opinion, will have to navigate through the specter of slowing U.S. defense budget growth, dysfunctional Pentagon procurement policies, an increasing proportion of lower-margin cost-plus developmental contracts, and Lockheed's ongoing mediocre returns on capital. Our discounted cash flow-based 12-month price target is $37.

Qualcomm (QCOM ): Reiterate 5 STARS (buy)

Analyst: Kenneth Leon, CPA

We believe the attractiveness of the shares has been increased by the company's 43% hike in its quarterly cash dividend, to 10 cents from 7 cents. Aside from our fiscal year 2004 (September) forecast of 25% sales growth and net margins near 30%, the company had $5.3 billion in cash and no debt at year-end calendar 2003. We expect Qualcomm shares to do better than the S&P 500 in 2004 as it takes advantage of its unique position in the global wireless market. Our 12-month target price is $80. Priced near peers on projected fiscal year 2005 EPS (our estimate is $2.10), we would buy Qualcomm shares.

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