Still Hold Pfizer and Merck

Also: analysts' opinions on Pre-paid Legal, Federated Department Stores; and more

Pfizer (PFE ) and Merck (MRK ): Maintains 3 STARS (hold)

Analyst: Herman Saftlas

The National Institutes of Health unit now recommends more aggressive use of cholesterol-lowering drugs. This expands the view that the number of Americans who could benefit from use to 36 million from the prior 13 million. This could eventually triple the present $10 billion market for those drugs. Pfizer's Lipitor leads with 46% of the U.S. market, followed by Merck's Zocor with 20%. AstraZeneca's new Crestor is being readied for launch. But Pfizer is adequately valued at a 20% premium to group P/E, while Merck is still facing major patent expirations.

Pre-Paid Legal (PPD ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Markos Kaminis

The SEC said that the company's commission accounting was not in conformance with GAAP. Pre-Paid's EPS would be affected by the accounting change, but S&P estimates that cash flows, upon which S&P values the company, would be similar. S&P's concern has been that the company could be required to reevaluate its reserving, and that remains unclear. News could strengthen shareholder lawsuits, and share performance could be weakened in the near-term. S&P would refrain from new purchases, but still believes shares should be valued by cash flow, which S&P values worth holding.

Federated Department Stores (FD ): Reiterates 3 STARS (hold)

Analyst: Karen Sack

The company posted $0.42 vs. $0.41 Q1 EPS, before restructuring charges, which was better than expected, on a 1.5% decline in same-store sales. Markdowns were high but good expense control aided results. The Fingerhut unit posted operating profit vs. a year-ago loss. Federated's operating income fell 11%. Although the company is lowering its EPS expectations for Q2, it still sees $4.00-$4.25 as doable for fiscal 2002 (Jan.) To conserve cash, Federated will lower capital expenditure plans by $75 million for fiscal 2002 and by $100 million for fiscal 2003. The company continues to buy back shares.

Apple Computer (AAPL ): Maintians 3 STARS (hold)

Analyst: Megan Graham-Hackett

Apple announced a plan to open 25 U.S. retail stores by year-end, with the first two stores to open May 19 in in Mclean, VA and Glendale, Calif. The company's retail strategy is targeted at gaining share vs. its PC peers by educating consumers on Mac's functionality (i.e., video editing, digital music/ photography). As opposed to Gateway Computer's retail locations, Apple will carry inventory at stores, which poses additional risks. The company sees retail business at breakeven in Q2, with a slight profit in fiscal 2002 (Sept.). However, there's no change to S&P's estimate yet. At 42 times the fiscal 2002 $0.55 EPS estimate, S&P ranks the shares hold.

Mentor Corp. (MNTR ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold).

Analyst: Robert Gold

The company posted $0.43 vs. $0.34 March quarter EPS -- $0.04 better than expected. Surgical urology sales surged 42% on the February purchase of Porges S.A. and on steady demand for braccytherapy seeds. Aesthetics and general surgery sales flattened, but breast implant average selling prices remained firm. The company sees 20% revenue and 15% EPS growth in fiscal 2002 (March), which compares favorably to medical device averages. S&P is boosting its fiscal 2002 estimate by $0.07 to $1.52, and sees fiscal 2003 EPS at $1.75. At 16 times the fiscal 2002 EPS estimate, and 1.4 times the fiscal 2002 sales estimate, Mentor is trading at a big discount to its peers.

Applied Materials (AMAT ): Reiterates 5 STARS (buy)

Analyst: Thomas Smith

The company posted Q2 fiscal 2001 (Oct.) EPS of $0.32 (before a $0.05 restructuring charge ) vs. $0.54, below the Street's estimates by a penny. Revenue fell 13% year over year and 30% quarter over quarter. New orders were down 44%. Book-to-bill sagged to 0.71. S&P sees Q3 revenue 35% lower sequentially, with EPS of $0.03. The largest maker of wafer fabrication tools is in the eye of storm as the chip industry slowdown hits cycle bottom. But advanced tools are selling well and the company should gain substantial market share in next-generation 300mm wafer fabs. S&P is lowering its fiscal 2001 estimate to $1.09 from $1.65; and reducing its fiscal 2002 estimate to $1.50 from $2.20.

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