S&P Says Hold Caterpillar

Caterpillar (CAT ): Reiterates 3 STARS (hold)

Analyst: Jason Sanders

The agricultural machinery maker announceD the retirement of chairman and CEO Glen Barton, 64, in Jan. 2004, due to the fact that he will reach the company's mandatory retirement age of 65 that year. He will be replaced by James W. Owens, 57, the current group president of the Component Products & Control Systems division. S&P was a bit surprised by the announcement, but views the leadership change as neutral. S&P continues to believe that Caterpillar, a Dow component, will maintain its market-leading positions in the global construction market. S&P is keeping the 12 month target price of $69.

Goodyear Tire (GT ): Reiterates 1 STAR (sell)

Analyst: Efraim Levy

Goodyear delayed the filing of an amended 10-K/A because of possible improper accounting issues in Europe. S&P expects the accounting review to delay the company's plan to raise capital pursuant to its obligations to the United Steelworkers of America. S&P doesn't think the union would exercise its right to strike, especially if the accounting changes are immaterial, since a strike would further weaken Goodyear. Assuming no strike, S&P believes the struggling company has breathing room to work on its turnaround, but is skeptical about the ultimate success of the restructuring.

Procter & Gamble (PG ): Maintains 5 STARS (buy)

Analyst: Howard Choe

The consumer-products company reiterated the December-quarter guidance. S&P estimates $1.25 December-quarter earnings per share, and $4.53 for fiscal 2004 (June). P&G sees total sales up 14% to 18%, with organic volume up 7% to 8% in the December quarter, which S&P thinks is impressive given year-ago comparisons. P&G cited the appeal of its diversified portfolio of stable household and high-growth health and beauty products. S&P sees strong brands, sales growth, and consistent low-to-mid-teen double-digit earnings per share growth driving shares. With a 12-month target price set at $114, S&P views the shares as undervalued, trading in line with peers (20 times the calendar 2004 earnings per share estimate), and at a discount to the discounted cash-flow value.

Black & Decker (BDK ): Reiterates 5 STARS (buy)

Analyst: Amrit Tewary

Following channel checks and recent statements made by Stanley Works, S&P thinks sales trends in the industrial tool market have improved in recent months. S&P believes Black & Decker is better positioned than peers for an industry recovery, and recommends that investors buy the shares. At 11 times S&P's 2004 earnings per share estimate of $4.24, shares are at a discount to historical norms and to the peer-average price-earnings of roughly 14. S&P's new 12-month target price of $59, raised from $55, assumes a group average p-e multiple of 14, based on the 2004 earnings per share estimate.

Watson Pharmaceuticals (WPI ): Reiterates 4 STARS (accumulate)

Analyst: Phillip Seligman

Watson's onychomycosis patch for nail fungus passed one Phase III trial but failed a second, and the company now has to decide the patch's future. The generic oral-contraceptive pact between Teva and Andrx could pressure Watson's rival generic patch. But with 70 generics in R&D, 16 generics pending FDA review, and three branded ones in late-stage development or pending FDA review, S&P see 15%-plus earnings per share growth over the next three years for Watson. S&P thinks the shares should trade at a premium to peers and the S&P 500, and is keeping the $49 12-month target price, which is 23 times the $2.11 earnings per share that S&P sees in 2004.

Gannett (GCI ): Reiterates 5 STARS (buy)

Analyst: William Donald

Publisher Gannett characterized its expected record 2003 results as among the strongest in the industry despite a difficult advertising environment, and continues to be cautiously optimistic about 2004. Because of weaker-than-expected fourth-quarter advertising business, S&P is shaving 5 cents from the 2003 earnings per share estimate, and now sees $4.48. S&P still sees an 18% earnings per share jump to $5.30 for 2004, and a 23% gain in per-share free cash flow to $4.07. At 19 times S&P's 2003 estimate and 16 times the 2004 estimates, Gannett is well below peers' p-e averages. S&P's target price of $106 still assumes a below-peer p-e of 20, based on the 2004 earnings per share estimate.

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