S&P Cuts U.S. Cellular to Avoid

Also: analysts' opinions on MBNA, BellSouth, Siebel Systems, and more

U.S. Cellular (USM ): Downgrading to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Kenneth Leon (CPA)

We believe U.S. Cellular may underperform the S&P 500 index in the next 12 months, as we see increased competitive risk. We think the company may lag its peers on revenue and EBITDA growth, given aggressive pricing from Cingular in Chicago, USM's largest market. We project 7% to 10% revenue growth in 2004 and 2005, which is below peers. We are maintaining our earnings per share estimate of $1.10 in 2004, but are cutting 2005's to $1.40 from $1.65. We are dropping our 12-month target price to $38 from $43, based on our 2005 estimate. Priced well above the market at 31 times our 2005 EPS estimate, we would avoid USM shares.

MBNA Corp. (KRB ): Keep 5 STARS (buy) Analyst: Evan Momios (CFA)

The U.S. Supreme Court announces its decision not to hear Visa and MasterCard's appeal in the antitrust lawsuit against them. Consequently, U.S. banks can now issue credit and charge cards outside the Visa and MasterCard networks. We expect MBNA to introduce American Express (AXP ) cards to inactive and new customers in the fourth quarter, which we think should boost income from interchange fees in 2005. We are keeping our 12-month target price of $32, 13.3 times our 2005 EPS estimate of $2.40, compared to 12.5 times and 14.5 times, respectively, on average forward 12-month EPS over the past 3 and 5 years.

Office Depot (ODP ): Reiterate 3 STARS (hold)

Analysts: Y. Wagle, J. Seo

We see today's announcement of a CEO change as positive for Office Depot. We believe that with a renewed focus on execution and accountability, the company should be able to improve profitability in its North American retail stores, gain market share in domestic business delivery, and realize higher top-line growth in its Guilbert operations. We are maintaining our 2004 EPS estimate of $1.10 and 2005's of $1.25. We are raising our 12-month target price by $1 to $17, or about 14 times our 2005 estimate, based on our expectations for better execution.

BellSouth (BLS ): Downgrading to 1 STAR (sell) from 2 STARS (avoid)

Analyst: Todd Rosenbluth

We believe recent hurricanes in the Southeast will hurt BellSouth's profitability. In addition to lost revenues, and repair costs incurred for the about 6% of BellSouth's total local access lines out of service, we think that the company's long distance and DSL penetration efforts were curtailed, impacting revenues and EBITDA margins in the third quarter. Furthermore, we do not believe BellSouth shares reflect the challenges its Cingular unit faces with the pending merger. Despite its 4% dividend yield, we would sell BellSouth, which is trading above our 12-month target price of $24, and focus on other telecom stocks.

Medtronic (MDT ): Downgrading to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Robert Gold

In our view, recent appreciation in Medtronic has largely been driven by investor rotation into non-pharmaceutical areas of the health care sector and favorable Medicare reimbursement news regarding implantable cardioverter defibrillators. We continue to have a bullish outlook on the device group and view Medtronic among the core holdings. But we do not envision meaningful near term valuation expansion with the shares trading over 25 times our calendar 2005 earnings per share estimate of $2.10, representing a PEG ratio of 1.7. Our 12-month target price of $54 is based on a blend of relative valuation and discounted cash flow (DCF) analysis.

Siebel Systems (SEBL ): Reiterate 3 STARS (hold)

Analyst: Jonathan Rudy (CFA)

Siebel Systems expects third-quarter total revenues to be about $315 million to $317 million, in line with our estimate of $316 million. The company forecasts third-quarter license revenues of about $104 million to $105 million, also in line with our estimate of $105 million. We are maintaining our 2004 EPS estimate of 20 cents, and our 2005 estimate of 25 cents. With a strong balance sheet, in our view, we would hold Siebel shares, which are trading at a discount to peers on an enterprise value/sales basis. However, with the company's inconsistent execution, and heavy exposure to stock options, we would not add to positions.

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