S&P Says Buy FedEx

FedEx (FDX ): Maintains 5 STARS (buy)

Analyst: James Corridore

S&P is raising the 12-month target price on package-delivery company FedEx to $95 from $78, reflecting S&P's view that it's appropriate to focus on fiscal 2005 (May). S&P thinks the shares should trade at 25 times S&P's fiscal 2005 earnings per share estimate of $3.80, pushing the company's current valuation out one year and keeping it in line with FedEx's historical price-earnings range. S&P notes that this keeps FedEx's valuation at a modest discount to United Parcel (UPS ), based on S&P's forecasts. S&P thinks an improving economy could lead to upside earnings surprises, which would make the valuation more compelling.

Career Education (CECO ): Suspends STARS rating

Analyst: Massimo Santicchia, Bryon Korutz, Michael Jaffe

Career Education shares tumbled Monday after an media report that the company is allegedly being sued in a wrongful-termination case brought by a former employee of its Gibbs unit. S&P awaits more detailed information and a response from Career Education. S&P notes that Gibbs College is a relatively small part of Career Education's total business, but S&P can't yet judge the possible ramifications of the allegations until there's more infomation. S&P's previous recommendation was buy. Meanwhile, shares of other education providers are under pressure after the news of the lawsuit. But S&P has no reason to believe these accusations should impact other for-profit education companies. S&P is keeping its buy recommendation on Corinthian Colleges (COCO ) with a 12-month target price of $83, and keeping its accumulate recommendation on Apollo Group (APOL ) with a 12-month target price of $86.

Wendy's (WEN ): Downgraded to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Dennis Milton

S&P continues to believe burger chain Wendy's has excellent long-term prospects, and expects earnings per share to increase 11% in 2003, driven by expansion and same-store sales growth of over 3%. However, its shares have risen more than 20% from September lows, and now trade at 19 times S&P's 2003 earnings per share estimate of $2.03, a premium to peer levels. S&P believes Wendy's shares remain attractive, given the company's growth potential and superior operating history, but also thinks they are less compelling at the current price. S&P's 12-month target price of $45 reflects a forward p-e of 20, based on the 2004 earnings per share estimate of $2.26.

Toys R Us (TOY ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Yogeesh Wagle

The toy retailer's October-quarter loss per share of 18 cents, vs. 13 cents is worse than the 4 cents loss per share that S&P expected. Toys R Us also set a plan to close 146 Kids R Us stores and 36 Imaginarium stores by the end of fiscal 2004 (Jan.). S&P is cutting the fiscal 2004 earnings per share estimate to $1.05, from $1.17 (before an accounting change), and trimming fiscal 2005's to $1.21, from $1.25. S&P views the strong balance sheet and below-market valuation as positives, but sees ongoing marketshare and margin pressure from mass market rivals. S&P's is paring the target price to $14, from $15, at 11.6 times the fiscal 2005 estimate. This reflects S&P's expectation of only a modest p-e expansion.

Alliance Capital (AC ): Maintains 4 STARS (accumulate)

Analyst: Robert Hansen

Alliance plans to take a $190 million third-quarter charge ($146 million after tax) for restitution and litigation costs stemming from the investigation of market timing in its mutual funds. S&P was surprised by the size of the charge, but believes it will help investors quantify the regulatory uncertainty and put the issue behind Alliance. S&P is leaving the operating earnings per share estimates and the 12-month target price unchanged. S&P would accumulate the shares given their attractive valuation, in S&P's view, and considerable potential upside, vs. the 12-month target price of $36.

Microsoft (MSFT ): Reiterates 5 STARS (buy)

Analyst: Jonathan Rudy

Monday's Wall Street Journal says Microsoft plans to launch a song-download service next year that will compete with similar offerings from Apple Computer and Roxio's Napster. Microsoft confirmed that its web-portal MSN will offer the service in 2004, but did not provide any detail. With coming price competition seen in this area, S&P views the service as more a strategic benefit for Microsoft to build its Web offerings rather than a significant revenue driver. S&P would buy Microsoft at its current discount to fair value, based on a discounted cash-flow analysis.

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