S&P Upgrades Caremark to Buy

Caremark Rx (CMX ): Upgrades to 5 STARS (buy) from 4 STARS (accumulate) and AdvancePCS (ADVP ): Maintains 4 STARS (accumulate)

Analyst: Phillip Seligman

Caremark agreed to buy AdvancePCS for $5.6 billion, 90% stock and 10% cash. AdvancePCS holders will receive the equivalent of 2.15 Caremark shares per AdvancePCS share. After the deal closes, seen in 2004 after holder and regulatory approvals, Caremark holders will own 58% of the merged company. S&P expects FTC approval, since the combined company will not be the largest pharmacy-benefits manager in terms of revenue. Assuming no synergies are realized in 2004, S&P sees the deal as earnings per share-neutral and sees Caremark posting $1.33. S&P believes earnings growth could accelerate thereafter on synergies. Also, S&P sees earnings growth from strong free cash flow, which should provide financial flexibility and may be used for acquisitions, debt paydown, or cash dividends. S&P sees Advance PCS as likely to trade largely on Caremark fundamentals. For Caremark, S&P's 12-month target price is $28.

Janus Capital (JNS ): Maintains 3 STARS (hold)

Analyst: Robert McMilla

Janus says it is cooperating with the New York State Attorney General's probe into illegal trading practices at the firm as well as other mutual fund businesses that allowed hedge funds to buy mutual fund shares at prices not available to most investors. S&P thinks the investigation may lead to future penalties but does not expect it to have a deep impact on operations. S&P's 2003 and 2004 earnings per share estimates of 89 cents and $1.16 are unchanged. Over the next 12 months, S&P sees Janus, now trading at a discount to the S&P 500, performing in line with the market, to which its results are closely tied.

Eli Lilly (LLY ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Herman Saftlas

The FDA issued an approvable letter on duloxetine for urinary incontinence, but final approval is contingent on Lilly completing more studies. S&P had expected a launch in early 2004, but Lilly does not now expect approval before late 2004 or the first half of 2005. FDA action also creates uncertainty on Lilly's experimental Cymbalta antidepressant, which is the same molecule as duloxetine. S&P expects further information at an analysts meeting on Friday. On the plus side, S&P thinks Lilly still has a broad-based R&D pipeline, and at 21 times S&P's 2004 earnings per share estimate, shares are trading at only a modest premium to its peers.

Shaw Group (SGR ): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Stewart Scharf

The stock is up 18% Wednesday as the company won a $570 million power plant contract in New York City, with Phase I expected to be operational in May 2006. S&P views this as a positive and is raising the target price to $11 from $9. S&P thinks Shaw is likely to generate positive free cash flow of $90 million for fiscal 2004, vs. the use of cash of $235 million in fiscal 2003. S&P's fiscal 2003 earnings per share estimate is $1.25 (before 72 cents in charges), with $1.15 seen for fiscal 2004. At nine times S&P's fiscal 2004 earnings per share estimate, shares are trading below peers, but amid the soft power markets, S&P would hold Shaw.

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