S&P Upgrades Wendy's to Buy

Wendy's International (WEN ): Upgrades to 5 STARS (strong buy) from 4 STARS (accumulate)

Analyst: Dennis Milton

September same-store sales grew 3.5% from a year ago at domestic Wendy's, 6.5% at Tim Horton's Canada, and 6.9% at Tim Horton's U.S. Wendy's repurchased 284,000 shares during the September quarter, bringing the total to 1.88 million for the year to date. S&P believes the continued strong sales performance at Tim's U.S. augurs well for extensive expansion of that chain. S&P is increasing its 2003 earnings per share estimate by 3 cents, to $2.03, and 2004's by 5 cents, to $2.24. At 15 times S&P's 2004 estimate, Wendy's shares are in line with peers despite, in S&P's view, the company's superior growth potential and sound operating history.

American Italian Pasta (PLB ): Upgrades to 5 STARS (strong buy) from 4 STARS (accumulate)

Analyst: Anishka Clarke

S&P views the 9% price drop of American Italian Pasta shares over the last seven trading days as an opportunity. S&P still sees double-digit growth in fiscal 2004 (Sept.) as a result of possibly lower durum wheat costs in 2004, geographic expansion, operational scale, and an ongoing cost reduction program. S&P's 12-month target price of $47 suggests significant upside, and is derived from a weighted average of S&P's $48 intrinsic value estimate and a blended price-earnings multiple for peers of 15 times S&P's calendar 2004 $3.02 estimate. At 13 times S&P's calendar 2004 estimate, a discount to peers, S&P finds the shares attractive.

Microchip Technology (MCHP ): Upgrades to 5 STARS (strong buy) from 4 STARS (accumulate)

Analyst: Thomas Smith

S&P's upgrade is based on valuation. Microchip shares trade at a discount to S&P's intrinsic valuation of $32, based on discounted cash flow analysis. The price to tangible book ratio of 4.4 times is near the average annual midpoint of the price-book range over the past decade, and at a large discount to the average annual high price-book range of 6.4 times. With S&P's view that the semiconductor industry expansion is broadening out, and with a new plant paid off and market share gains expected in 8-bit microcontrollers, S&P thinks Microchip shares should achieve S&P's 12-month target price of $33.

Walgreen (WAG ): Maintains 4 STARS (accumulate)

Analyst: Joseph Agnese

Total sales for September increased 17.6% on a 12.9% rise in comparable-store sales, both above S&P's expectations. Non-pharmacy sales grew 6.4%, continuing sequential and year-over-year gains. Pharmacy comp-store sales increased 16.9% as prescription volume rose 10%. S&P is maintaining the November-quarter earnings per share estimate of 28 cents, but thinks potential upside exists on improved wider-margin non-pharmacy sales. At 24 times S&P's calendar 2004 estimate of $1.34, above peers, with a growth rate that S&P projects at 15%, S&P thinks this industry leader will benefit from favorable industry trends. The target price is $38.

National Semiconductor (NSM ): Reiterates 3 STARS (hold)

Analyst: Megan Graham Hacket

National Semi reaffirmed its November-quarter guidance at an analyst meeting in New York on Oct. 1. The company is confident that revenues will be up 4% to 7% quarter over quarter on the strength of backlog, and sees gross margin at 48%. National Semi targeted 50% gross margin longer term, on a higher analog business mix, and S&P feels the company needs to achieve that target to warrant multiple expansion. S&P notes that the targeted power management market is highly competitive. S&P view National Semi as fairly valued on a price-sales basis, vs. peers. The 12-month target price is $35, based on discounted cash flow and price-sales analyses.

Vornado Realty Trust (VNO ): Reiterates 5 STARS (buy)

Analyst: Raymond Mathis

At Wednesday's investor conference, Vornado announced plans to expand financing at the operating unit level and issue bonds at the parent level, providing several hundred million dollars to grow the firm and redeem preferred without issuing more common equity. Several potential acquisitions are in the pipeline. The company expects to begin to distribute special capital gains dividends this year. Following the sale of 2 Park Avenue, the first of several planned, Vornado intends to roll much of its gains into acquisitions, and pay the rest to shareholders over the next two years.

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