S&P Downgrades Scientific-Atlanta, Gap, and Aeropostale

Plus: analysts also cut ratings on Patterson Companies, Red Robin Gourmet Burgers, Cooper Industries, East West Bancorp, Boston Private Financial Holdings and Steak n Shake

Scientific-Atlanta (SFA ): Cuts to 3 STARS (hold) from 5 STARS (strong buy)

Analyst: Ari Bensinger

The company agreed to be acquired by Cisco Systems (CSCO ) for $6.9 billion, or $43 a share. We are positive on this transaction, expected to close around the first quarter 2006, pending necessary approvals, since we believe Scientific-Atlanta needs leading IP transport architecture like Cisco's to take full advantage of the rapid industry convergence towards IP video. The proposed deal would also extend Scientific-Atlanta's customer footprint into all of the major regional Bell carriers. We are lowering our 12-month target price by $1 to $43, based on our expectation that the stock price will settle near the $43 cash bid.

Gap (GPS ): Cuts to 2 STARS (sell) from 4 STARS (buy)

Analyst: Marie Driscoll, CFA

We are lowering our estimates and 12-month target price, since we expect an increasingly difficult competitive marketplace for the legacy Gap brand, with its middle-of-the-road positioning, and for Gap's Old Navy value brand, together about 85% of total sales. With November traffic down 8%, we see a tough holiday for Gap, benefiting rival Urban Outfitters (URBN ) with its more eclectic merchandise strategy. Our fiscal year 2006 (ending January) and fiscal year 2007 estimates for Gap's decline to $1.16 and $1.20, from $1.28 and $1.40. Our target price falls by $6 to $15, or 12.5 times our 2007 estimate, 15% below peers.

Aeropostale (ARO ): Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Marie Driscoll, CFA

Aeropostale reports October quarter earnings per share of 47 cents vs. 57 cents, short of our 52 cents estimate. Comparable-store sales were down 1.5%, and gross margin contracted 660 basis points, partly offset by a 90 basis points reduction in the Selling General & Administrative expense ratio. Aeropostale entered the fourth quarter with inventory up 40%, and thus we see a gross (and operating) margin contraction in the fourth quarter. We see fashion or veneer products growing to 10% of the mix in fiscal year 2007 (ending January). We are reducing our 2006 and 2007 earnings per share estimates to $1.34 and $1.66, from $1.49 and $1.75. Our 12-month target price drops to $24 from $29.

Patterson Companies (PDCO ): Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Richard Tortoriello

Patterson Companies lowered its October quarter and fiscal year 2006 (ending April) earnings per share guidance, citing slower sales than forecast of basic dental equipment, as well as below-plan performance at Patterson Medical. We are lowering our fiscal year 2006 earnings per share estimate by 9 cents to $1.44, and fiscal year 2007's by 14 cents to $1.61. We are also lowering our 12-month target price to $38 from $46, or to 26.3 times our new fiscal year 2006 earnings per share estimate, below Patterson Co.'s 10-year average price to earnings ratio of 29 times. We continue to view the company's long-term prospects favorably, but are concerned that short-term difficulties, particularly with the Patterson Medical unit, may hold back the share price.

Red Robin Gourmet Burgers (RRGB ): Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst:William Mack, CFA

With Red Robin approaching what we see as intrinsic value, we think further gains will be hard-won in the more challenging spending environment we expect. The stock has retraced much of its losses since August, when it announced a management shake-up following an internal investigation into the travel-related expenses of its prior CEO. We still look for fourth quarter earnings per share of 47 cents. On our unchanged 2006 earnings forecast of $2.15 a share, our 12-month target price remains $55.

Cooper Industries (CBE ): Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Efraim Levy, CFA

Our downgrade is valuation-based, as shares are close to our $75 target price. We expect organic sales to rise 4% to 5% in 2006; we expect Cooper Industries to earn $4.09 in 2005 and $4.54 in 2006, up from prior estimates of $4.07 and $4.50, respectively. Cash flow generation should remain healthy and allow for repurchase of Cooper Industries shares and possibly minor acquisitions.

East West Bancorp (EWBC ): Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Christopher Muir

The company's shares have risen 13.5% since September 30, compared to a 6.3% increase in the S&P 500 Regional Bank index. We still view the company's fundamental outlook as positive, but we think the current share price appropriately reflects its earnings per share growth potential. We are maintaining our 2005 and 2006 EPS estimates of $1.98 and $2.41, respectively. We look for continued expense control and strong earning asset growth in 2005 and 2006. Our 12-month target price remains $41.

Boston Private Financial Holdings (BPFH ): Cuts to 1 STAR (strong sell) from 2 STARS (sell)

Analyst: Christopher Muir

Our downgrade is based on valuation, following a 17.3% rise in the stock price since Sept. 30, compared to a 6.3% increase in the S&P 500 Regional Banks index. We think the company's strong third quarter is responsible for some of the run-up and believe that it has a healthy business, but we believe the stock has become significantly overvalued. The stock currently trades at a 17% premium to its peers, but we think that premium should be very small based on our view of its earnings per share growth prospects. We are reducing our 12-month target price by $1 to $27 due to a small drop in our earnings per share growth outlook.

Steak n Shake (SNS ) : Cuts to 3 STARS (hold) from 5 STARS (strong buy)

Analyst: Dennis Milton

September quarter earnings per share of 31 cents before one-time items, vs. the year-ago 28 cents, is in line with our estimate. Same-store sales fell 3.0%, but earnings benefited from lower food costs and labor efficiencies. Full fiscal year 2005 earnings per share (ended September) grew to $1.08 from 99 cents. We are lowering our fiscal year 2006 estimate by 12 cents to $1.08, and our 12-month target price by $4 to $22 to reflect our reduced same-store sales projections. At 17 times our fiscal year 2006 estimate, the shares are at a slight premium to peers. While we are impressed by the company's growth prospects, we would not purchase its shares, absent improving customer traffic trends.

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