S&P Upgrades Pfizer to Accumulate

Pfizer (PFE ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Herman Saftlas

As the world's largest drugmaker, with most of its drugs heavily used by the elderly population, S&P views Pfizer as a prime beneficiary of the new Medicare prescription-drug plan that S&P expects will be enacted into law before the end of the year. S&P also projects Pfizer will sustain 15% to 18% earnings per share growth over the next few years, driven by a new drug pipeline that S&P views as the strongest in the industry, and by merger synergies. Valued near the average drug-group price-earnings ratio, the shares are at a discount to their intrinsic worth based on a discounted cash-flow model.

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

Analyst: Herman Saftlas

In S&P's opinion, this highly leveraged drugmaker also should reap material benefits from the new Medicare prescription-drug plan. S&P expects a resolution of the company's nagging manufacturing problems next year, which should pave the way for approval of its Cymbalta antidepressant -- a potential blockbuster drug. Lilly has other big numbers in its pipeline, which S&P thinks should drive above-average earnings per share growth over the next few years. Lilly is also valued at a discount to its intrinsic worth, based on a discounted cash-flow model.

Nextel Communications (NXTL ): Reiterates 5 STARS (buy)

Analyst: Kenneth Leon

In a recently filed 10-Q, mobile-communications company Nextel said its customer-care outsourcing plans are on track to realize $1 billion of reduced costs over an eight-year period. The company has also outsourced information technology, which will yield $140 million in cost savings over five years. S&P believes these cost-control initiatives will improve Nextel's efficiency; S&P also sees 20% sales growth in the year ahead. S&P's 2003 and 2004 earnings per share estimates of $1.35 and $1.82, respectively, are above consensus estimates. As Nextel is trading below the market at 13 times S&P's 2004 earnings per share estimate, S&P would buy the shares.

Medtronic (MDT ): Upgrades to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Robert Gold

Medical-device maker Medtronic posted fiscal 2004 (Apr.) second-quarter operating earnings per share in line with S&P's estimate, at 39 cents, vs. 34 cents. In S&P's view, the strong results were highlighted by market share gains in the implantable cardioverter defibrillator segment, a continuation of 25%+ growth in the spine segment, stable performance in the vascular area, and improved results in the diabetes segment. Gross and operating margins were at the high end of guidance, and S&P believes overall bullish trends will persist in the second half of 2004. Therefore, S&P is boosting the fiscal 2004 earnings per share estimate by 2 cents, to $1.64. Shares trade at a deep discount to the medical-device group at 24 times S&P's calendarized 2004 earnings per share estimate. The 12-month target price remains $57.

Applied Materials (AMAT ): Reiterates 4 STARS (accumulate)

Analyst: Richard Tortoriello

The chip-equipment maker's October-quarter earnings per share of 6 cents, before a 5 cents restructure charge, vs. 9 cents, and with 16% lower sales, is in line with S&P's estimate. Orders rose 22% from the July quarter, above S&P's expectations. S&P is raising the fiscal 2004 (Oct.) earnings per share estimate by 2 cents, to 50 cents and keeping the fiscal 2005 estimate at $1.12. S&P also upped the 12-month target price to $32, from $28. With chipmaking capacity tight worldwide, S&P sees 2004 as a good year for chip-equipment makers. With 60% of October-quarter orders for 300mm chips already underway, S&P believes Applied Materials is positioned to gain market share. Also, S&P notes that 68% of orders came from Asia, an area of strength for the company.

ImClone Systems (IMCL ): Maintains 5 STARS (buy)

Analyst: Frank DiLorenzo

Swiss authorities recommended approval of ImClone's cancer drug, Erbitux. S&P thinks formal approval is likely within 30 days. S&P sees U.S. and European Union approval of Erbitux by early 2004. The company will garner single-digit royalties on Swiss/E.U. sales from Merck KGaA, which licenses the right to market the drug, with a 39% take of U.S. sales from Bristol-Myers Squibb. ImClone reported a third-quarter loss of 22 cents per share -- narrower than S&P's 45 cents loss estimate -- due to lower R&D spending. S&P forecasts combined U.S. and European Erbitux sales of $179 million in 2004 and $381 million in 2005. On S&P's net present value analysis, S&P is maintaining the 12-month target price of $50.

Wal-Mart (WMT ): Reiterates 3 STARS (hold)

Analyst: Jason Asaeda

The world's largest retailer posted October-quarter earnings per share of 46 cents, vs. 41 cents -- meeting S&P's estimate. Profitability was limited by heavy markdowns at Wal-Mart stores and by lower gross margin at Sam's Club as cost savings were passed to customers. Inventories remain above-plan, but mainly because of global procurement, which compels Wal-Mart to own inventory longer. With customers buying close-to-need, and the company being cautiously optimistic on the holiday season, S&P sees gross margins under pressure in the near term. S&P still sees fiscal 2004 (Jan.) operating earnings per share at $2.04 and fiscal 2005's at $2.34. S&P's 12-month target price remains $64.

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