S&P Cuts Whirlpool to Hold

Also: analysts' opinions on CACI International, Lockheed Martin, Watson Pharmaceuticals, and more

Whirlpool (WHR ): Downgrading to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Amrit Tewary

We continue to think that industry trends are positive, and expect the recent uptrend in domestic shipments of major appliances to continue in 2004, driven by a sustained improvement in the overall economy, relatively low interest rates, and recent strength in the housing market. However, we are lowering our opinion on Whirlpool because we think the shares are fairly valued following their price run-up since early May. We now see roughly average appreciation potential to our 12-month target price of $75, which is based on our historical p-e model.

ChoicePoint (CPS ): Downgrading to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Bryon Korutz

We now see ChoicePoint as fairly valued, as the shares are trading near our 12-month target price of $49, which is the weighted average of our discounted cash flow (DCF) model, historical price/sales ratio, and p-e multiple-to-growth model. We are keeping our 2004 and 2005 earnings per share estimates of $1.66 and $1.80, respectively. Looking into the balance of 2004, and into 2005, we project that revenues will be aided by sales from existing clients, as well as by sales of new products, including Policy Watch and Current Carrier. But we still view the timing of new business from homeland security projects as uncertain.

CACI International (CAI ): Upgrading to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Massimo Santicchia

After allegations that some of its employees may have been involved in the abuse of Iraqi prisoners on May 5, 2004, we downgraded CACI International and reduced our 12-month target price as a result of our application of a higher risk premium in our valuation models. However, in light of what we believe are strong long-term industry fundamentals, and with the stock currently trading below our 12-month target price of $40, we now believe the downside risk for the shares is limited.

Lockheed Martin (LMT ): Reiterate 1 STAR (sell)

Analyst: Robert Friedman, CPA

Although Lockheed Martin is jettisoning, in our view, a highly valued $1.7 billion pact to acquire information systems maker Titan (TTN ), we nevertheless believe that investors should continue selling Lockheed shares. Given our assessment of modest long-term U.S. defense budget growth and mediocre defense industry economics, we believe Lockheed stock is trading at a material premium to its sustainable cash earnings growth and return-on-equity (ROE) potential. Our 12-month target price of $40 is based on our discounted cash flow (DCF) analysis, which uses, in part, 6% to 7.5% 10-year free cash flow growth rate, and 10% to 15% ROE estimates.

Watson Pharmaceuticals (WPI ): Maintain 3 STARS (hold)

Analyst: Phillip Seligman

Watson sees second-quarter operating earnings per share of 39 cents to 41 cents, vs. our 53 cents estimate, and $1.85 to $1.90 for full 2004, vs. our $2.11 forecast. Gross margin contraction accounts for 10 cents per share of the 2004 difference. Oral contraceptive competition and weak Oxytrol urinary incontinence patch sales have led Watson to deemphasize women's health and general products. The company now plans to focus on urology, nephrology and generics; close a plant; sharply cut salesforce; and cut research and development for non-core items. Our 2004 EPS estimate falls to $1.86. We further discount Watson's forward p-e to peers', and our target price falls by $7 to $34.

Campbell Soup (CPB ): Maintain 3 STARS (hold)

Analyst: Richard Joy

Campbell Soup lowers its long-term EPS growth rate estimates at an analyst meeting -- the company is now targeting 5% to 7% annual EPS growth, vs. its prior 8% goal, but keeps its 3% to 4% annual sales growth goal. We think new cost-saving initiatives should benefit earnings starting in fiscal year 2005 (July) but we remain cautious, given high commodity costs and expected spending behind new products. We are keeping our fiscal year 2004 EPS estimate at $1.58, and are trimming our fiscal year 2005 estimate by 2 cents to $1.66. We believe the shares are worth holding, given improving return on invested capital (ROIC) and a p-e discount to peers. Our 12-month target price is $28.

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