S&P Upgrades Emulex to 'Buy'

Also: analysts' opinions on Qwest Communications, Monster Worldwide, General Electric, Union Pacific, and Church & Dwight

Emulex Corp. (ELX ): Upgrading to 5 STARS (buy) from 3 STARS (hold)

Analyst: Richard Stice, CFA

We at S&P believe ELX, the marketshare leader in fibre channel host bus adapter components, is well positioned to benefit from the shift toward networked storage environments. Also, we view its execution as solid, with margins that have expanded for six straight quarters. ELX trades at a discount to the S&P 500 on p-e-to-growth, and to our discounted cash flow model, which assumes a 1.2 beta, 11.6% weighted average cost of capital, and 21% peak growth rate in year five and 3% terminal growth rate. Combining these metrics yields our 12-month target price of $27.

Qwest Communications (Q ): Keep 2 STARS (avoid)

Analyst: Todd Rosenbluth

Qwest shares are up about 10% today, reflecting, in our view, two pieces of good news. We at S&P believe Qwest's wholesale wireless agreement with Sprint PCS will allow more bundling opportunities. In addition, we see Qwest as one step closer to completing the sale of its directory business and receiving much needed cash. However, we still view Qwest shares unfavorably given the limited financial reporting amid its still pending results restatement and wireline customer retention difficulties. In our opinion, Qwest trades at an unwarranted enterprise value/EBITDA premium to peers.

Monster Worldwide (MNST ): Reiterate 1 STAR (sell)

Analyst: Mark Basham

America Online unit of AOL Time Warner (AOL ) signs a deal with Careerbuilder.com to replace MNST's Monster unit as its online job services content provider. The new agreement begins in mid-December 2003, so the initial material effects of the loss of this key client on MNST will likely be seen in 2004. We note that our 40 cents EPS estimate for 2004 is significantly below the Street estimate of 55 cents. We are reiterating our 12-month target price of $13. At a 100% premium to the S&P 500's p-e, we think this amply discounts the jobs recovery we see in 2004.

General Electric (GE ): Reiterate 3 STARS (hold)

Analyst: Robert Friedman, CPA

As part of GE's long-standing strategy of exiting businesses that are not No. 1 or No. 2 in its markets, the industrial and financing giant agrees to sell its bond insurer unit for $2.16 billion to a consortium led by mortgage insurer PMI Group. GE will book a small loss, though we believe it could have eventually secured a higher price. We are also skeptical about GE's strategy of redeploying capital from ostensibly slow-growing businesses, to ostensibly faster growing markets. GE shares are near our cash flow-derived $30 per share 12-month target price.

Union Pacific (UNP ): Reiterate 4 STARS (accumulate)

Analyst: Jim Corridore

UNP plans to divest its trucking unit Overnite Corp. (11% of 2002 revenues) via an IPO. If underwriters' overallotment is exercised in full, UNP will sell 100% of Overnite. The less-than-truckload carrier is profitable, but we think the cash raised will give UNP a lot of favorable options, including decisions about debt levels, dividend rates or increased growth. The planned move should also make it easier for UNP to use other LTL truckers in its Intermodal business. Plus, railroad margins are better than LTL trucking, so UNP's overall profitability levels should improve.

Church & Dwight (CHD ): Reiterate 4 STARS (accumulate)

Analyst: Howard Choe

Before unusual items, CHD posts second-quarter EPS of 46 cents, vs. 40 cents a year ago, 5 cents above our estimate. Gross margin expansion of 170 basis points was better than we expected, driven by integration benefits of acquisitions and cost reduction programs. A sales decline of 1% was in line with our projection. We are raising our 2003 EPS estimte to $1.85 from $1.79 and 2004's to $2.07 from $2.02 to reflect second quarter's upside and our view of the company's stronger outlook. Given CHD's strong profit growth trends, its shares appear attractive at 16 times our 2004 EPS estimate, and a modest discount to peers.

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