S&P Says Buy Microsoft

Microsoft (MSFT ): Reiterates 5 STARS (buy)

Analyst: Jonathan Rudy

Microsoft announced that it has agreed to settle class-action lawsuits brought by customers in five states and the District of Columbia for vouchers worth $200 million. Microsoft has now settled similar lawsuits in nine states and the District of Columbia for a total of $1.55 billion. However, suits are still pending in Arizona, Iowa, Minnesota, New Mexico, and Wisconsin. S&P is encouraged that Microsoft continues to make progress settling various pending litigation. S&P recommends purchasing the shares, trading at a discount to S&P's $35 12-month target price based on a discounted cash flow analysis.

Allstate (ALL ): Maintains 5 STARS (buy)

Analyst: Catherine Seifert

Allstate shares have weakened a bit amid concerns over the company's exposure to the California fires. As the third-largest homeowners' insurer in California, Allstate has an approximately 14% market share. Although there are no official insured loss estimates available yet, if S&P assumes insured losses of $1 billion and simplistically applies Allstate's 14% market share to that number, S&P arrives at an impact of less than 25 cents earnings per share. S&P maintains the full-year earnings per share estimates and the 12-month target price of $48, or 11.7 times S&P's $4.10 2004 estimate, in line with peers.

R.J. Reynolds (RJR ): Maintains 3 STARS (hold)

Analyst: Anishka Clarke

RJR and British American Tobacco agreed to merge their U.S. tobacco businesses to form a new publicly traded holding company, Reynolds American. British American will own 42% of the new company, and RJR shareholders will own 58%. The transaction is expected to close mid-2004 pending the usual approvals. The transaction will give British American a large presence in the U.S. and should provide scale economies to RJR. With combined sales in excess of $10 billion, and volume of about 136 billion units, Reynolds American should be a formidable competitor to Altria. After a sharp rise in RJR's shares on Tuesday, S&P would continue to hold the shares.

Avon (AVP ): Maintains 4 STARS (accumulate)

Analyst: Howard Choe

Before unusual items, Avon posted third-quarter earnings per share of 55 cents, vs. 48 cents, a penny above S&P's estimate. Sales growth remains strong, up 9% in local currency with volume up 3% and active sales representatives up 10%. Gross margin expanded 140 basis points, but operating margin slipped on costs for new initiatives. The new Mark young women's line seems to be off to a good start. Given Avon's strong momentum, S&P is raising the 2003 earnings per share estimate to $2.68, from $2.63, and is upping 2004's to $3.00, from $2.95. S&P also is raising the 12-month target price to $79, from $74, and thinks the healthy growth potential makes Avon shares attractive. The shares trade at 22 times S&P's 2004 earnings per share estimate.

Verizon Communications (VZ ): Maintains 3 STARS (hold)

Analyst: Todd Rosenbluth

Verison posted third-quarter operating earnings per share of 67 cents, vs. 77 cents, above S&P's 63 cents estimate. The results exclude a 3 cents one-time pension charge. Verizon's wireless growth was encouraging vs. peers, with 1.4 million net additions and widening margins. However, the larger wireline unit was pressured by 3.9% access line losses and higher selling, maintenance, and pension expenses. Even with gains in the digital-subscriber line and long distance businesses, S&P expects continued regulatory and competitive pressure to impact 2004 results. With a peer average operating p-e, and shares trading in line with S&P's discounted cash flow calculation, S&P would hold the shares.

American Express (AXP ): Maintains 3 STARS (hold)

Analyst: Michael Morgan

American Express posted third-quarter earnings per share of 59 cents, vs. 52 cents, in line with S&P's estimate. Better revenue growth than expected in the travel-related services segment was offset by higher expense growth from business-building initiatives. Stronger corporate, consumer, and small business spending contributed to a 15% rise in card-billed business, improving from the second-quarter's 10% growth. American Express reiterated the 2003 earnings per share guidance of $2.26 to $2.29. S&P still sees 2003 earnings per share at $2.29, sees 2004's at $2.60, and is adjusting the 12-month target price to $49, from $46, or 19 times S&P's 2004 estimate, in line with the historical average.

Before it's here, it's on the Bloomberg Terminal.