S&P Says Hold Yahoo

Yahoo (YHOO ): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Yahoo shares are down about 5% this morning on higher volume than average following Microsoft's announcement last night of a major upgrade to MSN Search. We believe the $100 million Microsoft invested to improve its online-search capabilities is significant, and could favorably affect MSN's competitive positioning in the online search area. In our recent Google Pre-IPO Report, Part 1, we indicated that we thought MSN trailed Google and Yahoo in several facets of online search. Based on our discounted cash flow analysis, our 12-month target price for Yahoo remains $35.

ConAgra Foods (CAG ): Maintains 3 STARS (hold)

Analyst: Richard Joy

ConAgra reported May-quarter EPS from continuing operations and before special items at 41 cents, vs. 36 cents, a penny below our estimate. Sales on a comparable basis gained 4%, while operating profits rose 2%. We are keeping our fiscal 2005 (May) EPS estimate at $1.65, a 9% rise. We expect ConAgra to apply free cash flows toward share buybacks and niche acquisitions. At 17 times our calendar 2004 EPS estimate of $1.60, in line with the p-e on packaged-food peers, we believe ConAgra shares are worth holding, given the divestitures of the commodity businesses and the 3.9% dividend yield. Our 12-month target price remains $29.

Wendy's International (WEN ): Maintains 4 STARS (accumulate)

Analyst: Dennis Milton

June same-store sales increased 2.3%, year to year, at domestic company-owned Wendy's stores and 0.5% at franchisees. Tim Horton's same-store sales increased 7.9% in Canada and 9.1% in the U.S. Sales underperformed our expectations at Wendy's units but exceeded our estimates for Tim's. We are maintaining our 2004 EPS estimate of $2.33, a 14% increase from $2.05 in 2003, and our 12-month target price remains $41. At 15 times our 2004 EPS estimate, shares trade in line with peers. We believe a premium is warranted, given Wendy's strong growth prospects and sound operating history.

Emulex (ELX ): Downgrades to 3 STARS (hold) from 5 STARS (buy)

Analyst: Richard Stice, CFA

Emulex sees June-quarter operating EPS of 18 cents, vs. the previous guidance of 25 cents, citing lower-than-anticipated demand from two customers. We believe demand weakness stems from marketshare erosion and customers' decision to wait for the release of next-generation products. We're reducing our fiscal 2004 (June) EPS estimate by 7 cents, to 91 cents, and cutting fiscal 2005's estimate by 27 cents, to 89 cents. We're also slashing our 12-month target price to $15, from $31. We continue to view Emulex's growth prospects and industry position favorably, but given the near-term uncertainty we see, we wouldn't add to existing positions.

Marriott International (MAR ): Maintains 3 STARS (hold)

Analyst: Thomas Graves, CFA

Our opinion reflects the view that shares will get support from prospects for improvement in lodging industry fundamentals, including higher demand in business travel. We're keeping our 2004 EPS estimate at $2.34, including 39 cents related to a synthetic fuel investment, which we view as lower quality EPS. Also, we're raising our 12-month target price on the stock to $51, from $48. We look for expectations of a further lodging industry upturn to cause the stock to retain some of its p-e premium to the S&P 500, currently about 24%, based on the projected 2004 EPS.

Time Warner (TWX ): Maintains 4 STARS (accumulate)

Analyst: Tuna Amobi, CFA, CPA

With Sony's bid for Metro-Goldwyn-Mayer evidently hitting structural, but likely non-fatal, hurdles, we're not surprised by a Wall Street Journal report that Time Warner has floated a preliminary unconfirmed offer to acquire the film studio and its library of 4,000-plus titles. Consistent with enhanced balance flexibility, the deal would entrench Time Warner's box office leadership with Warner Bros. and New Line Cinema, but could face some regulatory hurdles. We think MGM could fetch $4.5 billion to $5 billion. We don't believe a possible offer would jeopardize a likely bid for Adelphia's cable systems.

Cardinal Health (CAH ): Reiterates 3 STARS (hold)

Analyst: Phillip Seligman

Following Cardinal's warning that June-quarter and fiscal 2005 (June) EPS will be below its "mid-teens or better" guidance, we're cutting our fiscal 2004 EPS estimate by 10 cents, to $3.53, and cutting fiscal 2005's by 39 cents, to $3.88. The company notes faster-than-expected drugmaker inventory cuts, and we believe the shortfall also reflects a rough transition to a fee-for-service business model. More worrisome is Cardinal's receipt of a second Securities & Exchange Commission inquiry, this time into revenue classification. We're cutting our 12-month target price by $14 to $61, based on a forward p-e of 15.7, below the S&P 500's, on our fiscal 2005 EPS estimate.

Inveresk Research (IRGI ): Downgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Jeffrey Loo, CFA

Inveresk agreed to be acquired by Charles River Laboratories in a transaction valued at $1.5 billion, subject to necessary approvals. According to the terms of the agreement, Inveresk shareholders will receive 0.48 shares of Charles River Labs and $15.15 in cash for each share held. We believe the combination makes sense, forming one of the largest pre-clinical service providers. We're raising our 12-month target price to $39, from $36, and expect Inveresk shares to closely track those of Charles River Labs.

Constellation Brands (STZ ): Maintains 5 STARS (buy)

Analyst: Anishka Clarke

May-quarter operating EPS of 52 cents, vs. 49 cents, beat our 51 cents estimate. We're encouraged by strong revenue growth in wines and beers as U.S. wine sales to retailers exceeded shipments, the U.K. wholesale business continued to strengthen, and beer volumes rose despite a price hike. We see near-term margin contraction on aggressive marketing efforts, but look for overall volume growth in fiscal 2005 (Feb.) and margin recovery in fiscal 2006. Accordingly, we're raising our fiscal 2005 EPS estimate to $2.63, from $2.60. Our 12-month target price of $44, raised today from $40, is based on discounted cash flow and p-e analyses.

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