S&P Upgrades Oracle to Accumulate

Oracle (ORCL ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Jonathan Rudy, CFA

Oracle is trading at a discount to peers on price-earnings and P/E-to-growth metrics, but profitability is well above peers. S&P believes most of the business disruption surrounding Oracle's hostile bid for PeopleSoft is priced into the shares. With the Department of Justice and possible European Union opposition to the deal, S&P thinks there could be a positive catalyst if Oracle walked away from its bid. With business improving, S&P believes the shares are attractive at a discount to the 12-month target price of $15, up from $14, based on relative valuation and a discounted cash-flow analysis.

McDonald's (MCD ): Reiterates 3 STARS (hold)

Analyst: Dennis Milton

McDonald's announced the passing away of CEO Jim Cantalupo. Having assumed CEO duties in January, 2003, Cantalupo was widely credited with turning around company fortunes. His strategy of focusing on product development and investment at existing stores, as opposed to priced discounting and expansion, helped reverse several years of sagging sales trends and declining earnings. The hamburger chain named COO Charlie Bell as the new CEO. S&P believes Bell will continue to utilize current strategies. S&P is maintaining the 2004 earnings per share estimate of $1.71, and keeping the 12-month target price of $30.

Hasbro (HAS ): Maintains 4 STARS (accumulate)

Analyst: Amy Glynn, CFA

Toy maker Hasbro posted first-quarter earnings per share of 3 cents, vs. 1 cent, 2 cents below S&P's estimate. Revenue increased 3% to $474 million, below S&P's estimate, driven by a 14% increase in the games segment and by successful new product launches. Gross margin declined 210 basis points on a changing product mix; S&P see less significant declines in future quarters. Advertising and R&D expenses rose as part of Hasbro's strategy to invest in its brands, while all other expenses declined. S&P is trimming the 2004 estimate by two cents to $1.36, vs. $1.18 operating earnings per share in 2003. S&P's 12-month target price remains $26.

Wachovia (WB ): Maintains 5 STARS (buy)

Analyst: Evan Momios, CFA

The bank reported first-quarter earnings per share of 94 cents, vs. 83 cents, beating S&P's estimate of 89 cents. Strong results by market-related businesses, expense control, and improved asset quality boosted the bottom line. In S&P's view, Wachovia has a balanced business model that should continue to generate above-average revenue growth. Combined with improved credit quality and expense control, this should generate increasing earnings in a strong economy with rising interest rates. S&P is raising the 2004 earnings per share estimate to $3.87, from $3.77, and upping 2005's estimate to $4.37, from $4.19. S&P is also raising the 12-month target price by $2, to $62.

Eli Lilly (LLY ): Maintains 4 STARS (accumulate)

Analyst: Herman Saftlas

First-quarter earnings per share was 70 cents, before a 33 cents charge, vs. a year-ago's 61 cents -- 4 cents above S&P's estimate. Sales rose 17%, including 5% from the impact of foreign exhchange. Sales benefited from an 18% rise in Zyprexa-Symbyax, a 19% rise in Gemzar, and from new drugs Strattera and Cialis. But Lilly still guided for 2004 earnings per share to a range of $2.80 to $2.85, which reflects weak U.S. sales of Zyprexa and new drug launch costs. S&P views Lilly's pipeline as among the strongest in the industry, and sees antidepressant Cymbalta likely to launch in the third quarter. S&P is boosting the 12-month target price by $3, to $81, based on revised discounted cash-flow and price-earnings-to-growth analyses.

Medtronic (MDT ): Maintains 5 STARS (buy)

Analyst: Robert Gold

Medtronic voluntary recalled certain lots of its Micro Jewel II and GEM DR implantable cardioverter defibrillators (ICDs) after reports of one serious injury and four patient deaths were possibly related to battery failure. Although the shares are lower Monday, S&P notes that less than 2,000 of these older ICDs remain implanted, and the rate of battery failure appears to be only 0.05%. Medtronic doesn't see any material financial impact or increased scrutiny by the FDA. S&P doesn't expect the news to alter Medtronic's ICD market share dynamics, and is keeping its bullish stance on the stock.

Lexmark International (LXK ): Maintains 4 STARS (accumulate)

Analyst: Megan Graham-Hackett

Lexmark posted first-quarter earnings per share of 91 cents, vs. 73 cents, well ahead of S&P's 85 cents estimate, Upside came from revenues that were up 13%, to $1.26 billion, vs. S&P's $1.20 billion estimate, and higher gross margin. The company noted strength in supplies and printer sales to consumers, and some signs of strengthening in the business market. Lexmark sees first-quarter 2004 earnings per share of 88 cents to 98 cents, vs. S&P's 88 cents estimate. S&P is raising the 2004 earnings per share estimate by 15 cents, to $3.88. At 24 times this estimate, the shares are trading slightly above peers, but with strong execution and cash flow, the shares are undervalued.

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