S&P Says Hold Starbucks

Also: analysts' opinions on Flextronics and Merck. Plus more

Starbucks (SBUX ): Maintains 3 STARS (hold)

Analyst: Dennis Milton

Starbucks shares have fallen sharply today after the company announced that same-store sales rose 8% in August. Although this level of growth is below recent monthly results, it is in line with our estimate. We are maintaining our fiscal 2004 (Sep.) earnings per share estimate of 95 cents, our fiscal 2005 estimate of $1.15, and our 12-month target price of $47. At 36 times our calendar 2005 earnings per share estimate of $1.20, shares trade at a lofty premium to the S&P 500. We view this premium as justified, given our view of Starbuck's strong growth prospects, history of successful product innovation, and recent operating margin gains.

Flextronics (FLEX ): Maintains 5 STARS (buy)

Analyst: Richard Stice, CFA, Jonathan Rudy, CFA

On its mid-quarter update today, Flextronics reiterated its positive outlook for the remainder of calendar 2004. The company notes that every business segment was on track or exceeding expectations, and that the electronics-manufacturing services industry is improving across the board. We maintain our fiscal 2005 (Mar.) and fiscal 2006 earnings per share estimates of 73 cents and $1.00, respectively. We believe Flextronics remains attractive because of its favorable industry position, improving operating leverage, and attractive valuation. Our 12-month target price remains $17, based mainly on our discounted cash-flow analysis.

Merck (MRK ): Maintains 3 STARS (hold)

Analyst: Herman Saftlas

Kaiser Permanente, one of the largest U.S. HMOs, is reevaluating its use of Vioxx arthritis drug (U.S. sales of $1.5 billion) in the wake of studies showing linkage with higher cardiovascular risks, according to The Wall Street Journal . The studies also showed Vioxx with greater risks than Pfizer's competing Celebrex. On the plus side, we see significant growth in Merck's recently launched Vytorin cholesterol drug. On balance, we are trimming our 2005 earnings per share estimate by 3 cents, to $3.33. Our 12-month target price remains $51, on our revised p-e and discounted cash-flow assumptions. Merck's dividend currently yields 3.4%.

Krispy Kreme Doughnuts (KKD ): Maintains 3 STARS (hold)

Analyst: Dennis Milton

KRispy Kreme posted July-quarter earnings per share of 12 cents, excluding discontinued operations, vs. 22 cents, 12 cents below our estimate. Lower-than-expected sales growth, higher operating costs, and increased corporate spending hurt results. We're lowering our fiscal 2005 (Jan.) earnings per share estimate to 73 cents from $1.04, cutting our fiscal 2006 estimate to 96 cents, from $1.25, and trimming our 12-month target price by $2 to $16, to account for recent sales and cost trends. At 16 times our calendar 2005 earnings per share estimate, shares trade in line with S&P MidCap 400. Despite our view of considerable growth prospects, we would not add shares absent improved operating trends.

Ingersoll-Rand (IR ): Maintains 5 STARS (buy)

Analyst: John Hingher

IR announced that it has reached an agreement to sell its Dresser-Rand business to a fund managed by First Reserve Corp. for cash proceeds of approximately $1.2 billion. The sale is subject to regulatory approvals and is expected to close in the fourth quarter of 2004. We think management will use the proceeds from the sale to fund share repurchases and to pursue bolt-on acquisitions. We are not changing our estimates at this time, but await further details on the use of the proceeds. Our 12-month target price remains $93, and we would continue to add to positions.

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