Property and Casualty Insurance Sub-Industry (STA ) : Maintains Neutral Outlook
Analyst: Cathy Seifert
We expect this sub-industry group to come under some pressure today, as Hurricane Wilma slams into the Florida coast as a Category 3 hurricane. At this point, it appears that personal lines carriers will absorb most of the claims, with State Farm (a mutual insurer) and Allstate (ALL ), the two leading personal lines carriers based on market share. We also expect The St. Paul Travelers Companies (STA ), Progressive (PGR ) , American International Group (AIG ) and the Hartford (HIG ) to incur claims.
Merck (MRK ): Maintains 3 STARS (hold)
Analyst: Herman Saftlas
Merck posted an 8.2% rise in third quarter EPS to 65 cents, 2 cents above our estimate. Sales slid 2%, with a 3% drop from withdrawal of Vioxx partly offset by growth of 1% in other drugs. We expect ongoing margins to be aided by growth in newer products such as Zetia/Vytorin and more aggressive cost cuts. But we still see EPS falling to $2.20 in 2006, including an estimated 20-cent hit from options, from $2.50 we expect for 2005. We are encouraged by new life in Merck's R&D pipeline, but still think the stock is vulnerable to Vioxx headlines. Our target price remains $28, on discounted cash-flow plus maintenance of the $1.52 dividend.
Cendant (CD ): Maintains 3 STARS (hold)
Analyst: Thomas Graves, CFA
In our view, prospective year-ahead benefits from Cendant's plan to split itself into four separate publicly owned companies is more than offset by a sizeable reduction in the company's profit guidance. Subject to various conditions, including final approval from company directors, we expect the corporate split-up to occur in the summer of 2006. However, for Cendant as it is now constituted, we are cutting our 2006 EPS estimate to $1.50 from $1.65, and 2005's to $1.31 from $1.38 before about 20 cents of charges. With the lower EPS projections, we are trimming our 12-month target price to $23 from $24.
Boston Beer (SAM ): Initiates coverage with 3 STARS (hold)
Analyst: Anishka Clarke
We think the largest craft brewer and sixth largest beer producer in U.S. is well positioned to benefit from a strengthening super-premium category buoyed by ongoing trading-up activity and a diversified Samuel Adams beer portfolio. With likely price hikes aiding margin expansion, we see 2005 EPS of 99 cents, up 15%, and 2006's at $1.09. We would hold the shares, trading near our 12-month target price of $26. The target blends our DCF analysis, which uses an 8.5% cost of capital and 5% five-year annual growth rate, and our p-e valuation, which applies above-peer 26 times to our 2006 estimate.