Lilly Lowered to Accumulate

Eli Lilly (LLY ): Downgraded to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Herman Saftlas

Lilly announced disappointing Phase III clinical trials on its Affinitak lung cancer drug. This represents the second pipeline setback in recent weeks. However, we at Standard & Poor's were not anticipating blockbuster status for Affinitak in any case. On the plus side, Lilly still has one of the strongest R&D pipelines in the industry. We still expect four more blockbusters to be launched over the next 18 months, with the resolution of nagging FDA cited manufacturing issues. Lilly's premium multiple to its industry peers is justified by the high teens EPS growth we see for the 2004-2006 period.

Pfizer (PFE ): Reiterates 5 STARS (buy)

Analyst: Herman Saftlas

Pfizer's $52 billion stock acquisition of Pharmacia is now expected to close in April, following a recent agreement with the FTC. Pfizer noted that agreements are in place with buyers for assets to be divested, which individually and in the aggregate are not material to the company. With annual cost synergies of $2.5 billion, we see pro forma EPS of $1.80 in 2003 and $2.07 in 2004. The combined Pfizer-Pharmacia has an intrinsic value of $37 per share based on our free cash flow assumptions. And at 14 times our 2004 EPS estimate, Pfizer is attractively priced below its industry peers.

Verizon Communications (VZ ): Reiterates 2 STARS (avoid)

Analyst: Todd Rosenbluth

A review of Verizon's Form 10-K report validates our concerns for the Bell's earnings quality. We at Standard & Poor's believe the company's Standard & Poor's Core Earnings were $1.62 per share compared to $3.05 in operating earnings in 2002, with $1.47 in pension and post-retirement adjustments. Even with Verizon's assumption reductions, we see $2.30 in Core Earnings compared to $2.72 in operating results for 2003. Despite trading near our discounted cash flow valuation, as the most expensive of the Bells on a p-e and enterprise value/EBITDA basis, Verizon is above our blended price target and is unattractive.

Mohawk Industries (MHK ): Reiterates 3 STARS (hold)

Analyst: Efraim Levy

Mohawk warned of lower than expected EPS in the first and second quarters. The company cited concerns about softening markets and lower consumer confidence. Results are being hurt by geopolitical uncertainty and harsh winter weather conditions. Lower capacity utilization and higher raw material costs are also penalizing performance. The company sees first and second quarter EPS in the ranges of 60 cents to 63 cents and $1.05 to $1.15, respectively; both are below Wall Street mean EPS estimates. We are putting our estimates under review. We will update our comments following Mohawk's morning conference call.

NCR Corp. (NCR ): Downgraded to 1 STAR (sell) from 3 STARS (hold)

Analyst: Megan Graham-Hackett

While NCR shares are selling below their peer average on a price-to-sales basis, we believe there is further downside risk to earnings per share expectations for the company, and therefore the stock. Wall Street expectations for 2003 have come down sharply, to account for the effects of pension expense, but we believe that forecasts for sales growth in NCR's retail division are likely too optimistic given pressure that group could face in the wake of weak consumer confidence. We are keeping our below-consensus estimates unchanged for now.

DQE Inc. (DQE ): Downgraded to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Justin McCann

With operating earnings expected to drop slightly in 2003 and to remain flat in 2004, we expect the shares to underperform. While the proceeds from a $224 million equity issuance helped retire some of the company's debt, the resulting decline in interest expense has been offset by a 13% increase in shares outstanding. DQE's liquidity has improved with the ongoing divestiture of non-core assets and last October's 40% cut in the dividend. But, with a dividend payout ratio at 87% of our 2003 estimate of $1.15, the company's financial flexibility remains restricted.

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