S&P Says Buy Fortune Brands

Fortune Brands (FO ): Reiterates 5 STARS (buy)

Analyst: Howard Choe

Given the closing of the Therm-tru acquisition in November and S&P's updated earnings per share estimates, S&P is raising the 12-month target price to $83, from $79 -- a price-earnings of 19, based on the 2004 earnings per share estimate. Incorporating the expected earnings accretion from Therma-tru, S&P is upping the 2004 earnings per share estimate to $4.28, from $4.14. Fortune, a distributor of imported liquor and office supplies, among other items, has shown a strong earnings growth record -- a 17% average for five years -- as well as accretive acquisitions. Mid-teens earnings per share growth is expected for 2004. For these reasons, S&P thinks Fortune should trade at a premium to the S&P 500 and views the shares as undervalued at 16 times S&P's 2004 estimate.

Interstate Bakeries (IBC ): Downgrades to 1 STAR (sell) from 2 STARS (avoid)

Analyst: Richard Joy

Interstate announced that it expects to report a 1% sales decline and a 30% drop in operating income for its second fiscal quarter ending Nov. 15. S&P is reducing the November-quarter earnings per share estimate by 6 cents, to 20 cents, and is trimming the fiscal 2004 (May) earnings per share estimate by 2 cents, to 79 cents, as higher retiree healthcare contributions should help to reduce costs during the second half. Despite efforts to improve operations, S&P thinks the bakery-goods distributor, which owns the Wonder and Hostess brands, continues to struggle with weak bread and snack-cake trends and high costs. S&P has a 12-month target price of $12, derived from an analysis of Interstate's discounted cash flow.

Texas Instruments (TXN ): Reiterates 5 STARS (buy)

Analyst: Thomas Smith

The chipmaker's mid-quarter update guided to a higher range for fourth-quarter revenue and earnings as demand for wireless handset components and most semiconductor lines rose in the quarter. S&P now models TI's fourth-quarter revenues at $2.736 billion and sees earnings per share at 19 cents (excluding a 7 cents gain on the sale of Micron Technologies), up from $2.660 billion and 16 cents earnings per share, respectively. S&P also is raising the 2004 earnings per share estimate to 95 cents, from 85 cents, and is upping the 2005 estimate to $1.30, from $1.20. A week ago, TI's shares traded at a p-e of 35 times S&P's 2004 estimate. S&P's 12-month target price of $42 reflects a more conservative p-e of 33, applied to the new 2005 earnings per share estimate.

Barr Laboratories (BRL ): Reiterates 5 STARS (buy)

Analyst: Herman Saftlas

S&P thinks the planned purchase of Endeavor Pharmaceuticals for $35 million will strengthen Barr's rapidly growing position in women's healthcare. Endeavor's main drug is Enjuvia, a synthetic conjugated estrogen, which S&P thinks has the potential to compete against Premarin. Despite initial modest dilution, S&P expects Endeavor to be accretive in fiscal 2005 (June). Assuming the purchase, S&P is lowering the fiscal 2004 estimate by 3 cents, to $3.22, and is raising the fiscal 2005 projection by 3 cents, to $3.78. Also, S&P is hiking the target price by $5, to $96, based on a blend of S&P's discounted cash-flow valuation, forward p-e estimates, and p-e-to-growth estimates.

International Paper (IP ): Maintains 3 STARS (hold)

Analyst: Bryon Korutz

Based on S&P's expectations of a continued firming of the U.S. economy, S&P sees the demand and prices of paper and packaging strengthening in 2004, with most of the recovery expected in 2005. S&P is increasing International Paper's 2005 earnings per share estimate for to $3.70, from $2.58. Turning to S&P's valuation metrics, S&P's discounted cash-flow model indicates that the stock is worth $46 a share. By applying a peak p-e multiple of 10 to S&P's 2005 earnings per share estimate, S&P values the stock at $37 per share. Although S&P sees paper and packaging fundamentals improving, S&P would still hold the stock, as the shares are close to to the blended target price of $41.

Furniture Brands (FBN ): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Furniture Brands reiterated its earnings per share guidance for the fourth quarter of 38 cents to 42 cents, and for 2003 of $1.66 to $1.70. The furniture retailer says that its accelerated reorganization actions and its efforts to reduce inventories are both proceeding as planned. S&P continues to expect Furniture Brands to benefit from a pickup in orders and shipments in 2004. S&P is keeping the earnings per share estimates for the fourth quarter at 39 cents. Also, S&P will keep the 2003 estimate at $1.67 and the 2004 estimate at $1.96. S&P's 12-month target price of $27 assumes a historical average p-e of 14 times S&P's 2004 earnings per share estimate. With a 1.9% dividend yield, S&P would hold the shares.

Mentor Graphics (MENT ): Maintains 4 STARS (accumulate)

Analyst: Richard Tortoriello

S&P is lowering the 12-month target price to $20, from $24. The new target price represents a multiple of 24 times S&P's 2004 earnings per share estimate of 82 cents. Mentor has three new product lines that are growing rapidly and now contribute significantly to sales: Calibre, TestKompress, and wire harness design products. In addition, the more mature printed circuit board product line continues to perform well. Mentor currently sells at 1.5 times sales, vs. 4.3 times for its two larger competitors, and below the 10-year average of 1.8. S&P views the shares as attractive.

Marsh & McLennan (MMC ): Maintains 1 STAR (sell)

Analyst: Susan Dawkins

Four public pension funds announced plans to use an anticipated Securities & Exchange Commission proposal to nominate and elect independent directors to Marsh's board. The funds' cited concerns that trading scandals at Marsh's Putnam unit were the result of deficient corporate oversight, a lack of independent board leadership, and excessive executive pay. This news, combined with significant asset withdrawals over the last month and a half, further heightens S&P's concern over Putnam's impact on Marsh & McLennan. Shares are trading above S&P's $37 target price, based on a sum-of-parts analysis applied to S&P's 2004 estimate.

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