S&P Upgrades Nextel to Buy

Also: analysts' opinions on State Street and Eli Lilly. Plus more

Nextel Communications (NXTL ): Upgrades to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Kenneth Leon, CPA

Although Nextel shares have lagged the S&P 500 in the last three months, we believe their current valuation reflects higher capital outlays for licensed spectrum and 3G network upgrades. But, we expect Nextel to generate positive free cash flow in 2004-06, with EBITDA growing annually by 17% to 20%, above peers. With the planned merger of Cingular and AT&T Wireless, Nextel should become the largest pure-play in the wireless sub-industry, with a $29 billion market cap. We are raising our 12-month target price to $29 from $24, based on shares trading at 16.5 times our $1.75 2005 earnings per share estimate. Priced below peers, we would buy Nextel.

State Street (STT ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Evan Momios, CFA

State Street posted third-quarter operating earnings per share of 55 cents, vs. 65 cents, below our 68 cents estimate. Revenue was significantly below our expectations and declined more than operating expenses. We view management's announced cost-cutting initiatives as positive in the longer term. However, we believe the challenge will be to balance cost control with revenue growth opportunities in the quarters ahead. We're lowering our 2004 operating earnings per share estimate by 21 cents to $2.48, and 2005's by 34 cents to $2.70. We're also cutting our 12-month target price by $9 to $46, or 17 times our 2005 estimate, given our subdued outlook.

Eli Lilly (LLY ): Downgrades to 3 STARS (hold) from 5 STARS (buy)

Analyst: Herman Saftlas

We see Lilly remaining under pressure from weakness and patent litigation uncertainty in Zyprexa, which accounts for about 40% of earnings. In our opinion, drug-sector multiples are also compressing on heightened concern over a possible Kerry victory in the presidential election. We're lowering our earnings per share estimates by 2 cents to $2.78 for 2004, and by 10 cents to $3.15 for 2005. On the plus side, we believe Lilly still has one of the strongest new drug pipelines in its group, explaining its premium p-e multiple to peers. We're reducing our 12-month target price by $11 to $65, which assumes a p-e of 20.5 times our 2005 earnings per share estimates.

Johnson & Johnson (JNJ ): Maintains 5 STARS (buy)

Analyst: Robert Gold

J&J posted third-quarter earnings per share of 78 cents, vs. 69 cents, 1 cent above our forecast. Revenues of $11.6 billion met our estimate. We attribute the earnings per share upside mainly to a lower-than-expected tax rate. We're impressed by 11.1% organic growth in pharmaceuticals and 9.9% growth in the consumer franchise. U.S. sales of the Cypher stent were affected by loss of market share to Boston Scientific, but J&J expects to meet higher Cypher demand in the fourth quarter with increased manufacturing capacity. With a lower tax rate assumption, we're raising our 2004 earnings per share estimate by 3 cents to $3.06. Our 12-month target price is $70.

Disney (DIS ): Maintains 3 STARS (hold)

Analyst: Tuna Amobi, CPA, CFA

We're encouraged by early signs of a prime-time ratings surge for the ABC unit, a kind that hasn't been seen in several years. With solid new dramas on Wednesday and Sunday nights -- "Lost" and "Desperate Housewives" -- and reality series "Wife Swap" and "Extreme Makeover: Home Edition," ABC has gained on CBS and NBC in all key demographics, including core adults age 18 to 49. Meanwhile, "Monday Night Football" remains solid, and Tuesday is riding a returning comedy block. But with the 2004 and 2005 season just three weeks old, it remains to be seen if this early trend marks a genuine turnaround from ABC's long ratings abyss.

Motorola (MOT ): Maintains 5 STARS (buy)

Analyst: Kenneth Leon, CPA

We're not concerned by news of Motorola's action to dissolve its pact with Proview International, a TV supplier in China. We've been skeptical of Motorola's rationale for selling TVs, while we think its wireless systems unit deserves closer focus. We see Nextel selecting a 3G vendor by January, and the technology it selects -- CDMA or OFDM -- may affect Motorola's chances of winning the order. Should Motorola lose the Nextel order, we believe its commitment to wireless systems may lessen. However, based on a strong handset outlook and shares trading at one times our 2005 sales estimate, we would buy Motorola.

EMC Corp. (EMC ): Maintains 5 STARS (buy)

Analyst: Richard Stice

EMC announced the acquisition of Dantz Development, a privately held software provider for the small and midsize business (SMB) market. The transaction closed on Oct. 8, for a purchase price of less than $50 million in cash. We believe the deal further supports EMC's strategic push into the storage-software market; it marks the company's 15th such acquisition since early 2000. Moreover, we think the move to expand its SMB product offerings is prudent, given our view that this segment is a key growth driver for the storage industry. Our 12-month target price remains $17.

Home Depot (HD ): Reiterates 4 STARS (accumulate)

Analyst: Yogeesh Wagle; Mark Hebeka, CFA

We see continued strength in housing sales spurred by historically low interest rates that are driving home-improvement sales growth. Additionally, we think Home Depot's increased focus on at-home services, store retooling, and international expansion will boost sales. We're increasing our fiscal 2006 (Jan.) earnings per share estimate to $2.55 from $2.50. Our discounted cash-flow analysis yields an intrinsic value of $44 to $46 for Home Depot, which is trading at 16 times our fiscal 2006 estimate, in line with the S&P 500. We're raising our 12-month target price to $46 from $41, based on blend of relative and intrinsic valuations.