S&P: Still Avoid Merck

Also: analysts' opinions on Sunoco, Hartford Financial, and Goodyear. Plus more

Merck (MRK ): Reiterates 3 STARS (hold)

Analyst: Herman Saftlas

Merck shares continue to decline following a recent article in the British medical journal Lancet claiming the company should have withdrawn Vioxx four years ago, given evidence that the drug doubled heart attack risks vs. a placebo. We think this data provides further fuel to the growing onslaught of Vioxx suits, which we believe may eventually raise Merck's legal liability costs to over $10 billion. But, the company remains a leading drugmaker, with $22 billion in annaul sales and $13 billion in cash and investments. Our 12-month target price remains $26, given a p-e ratio of 10 times our $2.50 2005 earnings per share estimate.

Sunoco (SUN ): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Tina Vital

As a diversified refiner focused on light/sweet crudes, we expect Sunoco's earnings will benefit from improved chemical prices. We also note that Sunoco has increased its financial flexibility through debt reduction and the refinancing of $350 million of debt. However, we see a downside risk to U.S. refining margins due to slowed economic growth and a build in inventory levels. We are reducing our 2004 earnings-per-share estimate by 11 cents to $7.35 and 2005's by 27 cents to $5.88. A blend of our discounted-cash-flow and peer-multiple valuations leads us to keep our target price at $70, about 12 times our 2005 earnings-per-share estimate and a premium to peers.

Hartford Financial (HIG ): Reiterates 4 STARS (accumulate)

Analyst: Catherine Seifert

Hartford Financial posted $1.57, vs. $1.18 third-quarter operating earnings per share, besting our above-Street 95 cents estimate, as $265 million tax benefits offset $263 million of catastrophe losses. The 11% rise in third-quarter life revenue and 9% higher property casualty premiums were at the high end of our forecast. We still see $5.70 operating earnings per share in 2004, but are raising 2005's estimate by 10 cents to $7.15 on our projection of 10% to 12% life revenue growth, 10% higher property-casualty premiums, and wider margins. Our 12-month target price of $72, raised $2 today, assumes that forward p-e remains low in historical range amid ongoing regulatory uncertainty.

Goodyear (GT ): Reiterates 2 STARS (avoid)

Analyst: Efraim Levy, CFA

Goodyear expects to report third-quarter earnings per share of 19 cents to 21 cents, vs. a year-ago loss of 68 cents, above our 12 cents forecast but only modestly above the Street's 19 cents. Sales and margins appear better than we expected. Full details are expected to be released early next week. In the meantime, we are raising our 2005 earnings-per-share estimate to 63 cents from 54 cents. While liquidity should cover near-term obligations, we are concerned about Goodyear's ability to grow enough to meet future debt and retiree obligations. Based on a combination of p-e and discounted-cash-flow analysis, we are raising our 12-month target price to $11 from $9.

Nvidia (NVDA ): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

Nvidia reported October-quarter earnings per share of 15 cents, vs. 4 cents, 3 cents above our estimate. Sales rose 6% from year ago, and 13% from the July-quarter, in line with our forecast. Gross margin widened 160 basis points from the July-quarter due to a greater mix of higher-margin performance products. Selling, general, and administrative and research and development expense levels were much lower than we expected. On higher margin assumptions, we are raising our January-quarter earnings-per-share estimate to 17 cents from 14 cents, full fiscal 2005's (Jan.) to 47 cents from 41 cents, and fiscal 2006's to 83 cents from 71 cents. We are raising our 12-month target price to $19 from $16, based on our p-e and price-to-sales analyses.

Univision Communications (UVN ): Reiterates 4 STARS (accumulate)

Analyst: Tuna Amobi, CPA, CFA

At its third-quarter call, Univision says that TV network scatter for the fourth-quarter is slowing about 50%, vs. the first nine months. While this is a bit perplexing, we see no systemic slowdown in the Spanish media market, which we think should outgrow the industry by nearly 3 times going into 2005. We think Univision is in the early stages of synergies from TV/Radio integration as it nurtures nascent music and online businesses. We are reducing our 2004 earnings-per-share estimate by 2 cents to 72 cents, and 2005's by 3 cents to 84 cents. Our 12-month target price remains $40, a steep premium to peers on price-to-free cash flow and enterprise value-to-EBITDA.

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

Analyst: Phillip Seligman

September-quarter operating earnings per share of 55 cents, vs. 74 cents, is 2 cents below our estimate. The shortfall reflects fewer price hikes by drugmakers and several other issues, some of which we think should be resolved shortly. Cardinal Health is prodding drugmakers to move to fee-based compensation for wholesalers by fiscal 2005 (June) year-end. We see the move, if successful, aiding in margins. We think strong cash flow will provide flexibility. The SEC accounting probe continues. We are raising our forward p-e to 13.5 from 13, modestly above peers. As a result we are boosting our target price by $3 to $49, 13.5 times our calculated 2005 estimate of $3.62.

Avery Dennison (AVY ): Reiterates 3 STARS (hold)

Analyst: Richard O'Reilly, CFA, James Corridore

In a very vague 8-K filing, Avery Dennison said it had discovered that certain employees in its European operations have engaged in "improper conduct." The discovery was made during Avery Dennison's own review, prompted by a European Commission investigation into anticompetitive activities in the European paper and forest products sector. As a result, the company expects the European Commission to fine it up to 10% of its annual revenues. Until more details emerge, we would not recommend adding to positions, but we think Avery Dennison would be able to pay a large fine without materially hurting its finances.

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