S&P Keeps Avoid on Merck

Also: analysts' opinions on IBM, PeopleSoft, Chevron Texaco, and more

Merck (MRK ): Reiterate 2 STARS (avoid)

Analyst: Herman Saftlas

Merck shares are weak today after a report in today's Wall Street Journal alleging the company was aware of data indicating cardiac risks with Vioxx but suppressed it for several years. In our view, the news, if proven true, would significantly increase Vioxx-related legal liabilities, which are still unreserved. While Merck's resources include over $13 billion in cash and investments, we would avoid the shares based on uninspiring earnings per share prospects and growing risks from Vioxx. We are lowering our target price by $2 to $26, based on our revised forward price-earnings and discounted cash flow (DCF) models.

International Business Machines (IBM ): Upgrading to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Megan Graham-Hackett

In our opinion, IBM's recent third-quarter earnings per share report showed the benefits of its diversified product portfolio in a moderately growing IT spending environment. We see potential for acceleration in 2005, as IBM has taken share from its competition in the server market by effectively differentiating its product, and because the company has begun to hit traction in the improvement of operating performance of its microelectronics division. Our discounted cash flow (DCF)-derived 12-month target price remains $105; however, we see risks associated with the stock as mitigated, and believe IBM shares are undervalued.

Sysco (SYY ): Maintains 5 STARS (buy)

Analyst: Anishka Clarke

Sysco posted September-quarter earnings per share of 35 cents, vs. 32 cents, below our 37 cents estimate. Sales, net of 5.9% inflation, were flat on retail softness. For fiscal year 2005 (June), we see a modest recovery in dining out activity, despite possible pricing pressures. We expect inflation to moderate as lower dairy prices partially offset meat pressures. But, with the first redistribution center opening in early 2005, we expect greater efficiencies long-term. We are lowering our fiscal year 2005 EPS estimate to $1.50 from $1.58, fiscal year 2006 to $1.77 from $1.82; and our 12-month target price to $39 from $40 based on discounted cash flow (DCF) analysis.

PeopleSoft (PSFT ): Reiterate 3 STARS (hold)

Analyst: Jonathan Rudy, CFA

Oracle (ORCL ) increased its cash tender offer to approximately $8.8 billion, or $24 per share, from $7.7 billion, or $21 per share. The latest offer values PeopleSoft at approximately 31 times our 2005 operating earnings per share estimate of 77 cents, and at 3.2 times revenues, a fair value, in our opinion. Oracle says it will withdraw the offer unless the majority of PeopleSoft shares are tendered by Nov. 19. We are raising our 12-month target price for PeopleSoft to $24 from $23 in order to reflect Oracle's cash offer. With PeopleSoft shares trading near Oracle's offer, we would hold positions.

Chevron Texaco (CVX ): Reiterate 5 STARS (buy)

Analyst: Tina Vital

The company posted third-quarter earnings per share of $1.38, vs. 90 cents, 3 cents below our estimate. The shortfall reflects a sharp drop in U.S. West Coast refining and marketing margins and a 5.6% drop in hydrocarbon production on asset sales and the loss of Gulf of Mexico production due to Hurricane Ivan (25,000 boe/d lost in the third quarter; 50-60,000 boe/d loss expected in the fourth quarter; and 30,000 boe/d loss expected in the first quarter). Chevron Texaco plans to raise 2005 spending by 13% to around $9.65 billion; we expect about flat production in 2005 but see an increase in 2006 and beyond. We are reducing 2004 EPS forecast by 5 cents, to $5.74, and raising 2005's by 11 cents, to $5.48. We are keeping our target price at $65.

DoubleClick (DCLK ): Reiterate 3 STARS (hold)

Analyst: Scott Kessler

Late last night, DoubleClick announced it had hired an advisor to explore options to enhance shareholder value, including business sales, recapitalization, an extraordinary dividend, share repurchases, and a spin-off. We believe the sale of the entire company is also a possibility. As of September 2004, DoubleClick had some $418.9 million ($3.26 per share) in net cash and investments. Although we believe the company could be successful in actualizing greater shareholder value, we think that customer concerns about possible business sales could negatively impact near-term revenue.

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