S&P Keeps Strong Buy on IBM

Plus analysts' opinions on Hewlett-Packard, Johnson & Johnson, and more

IBM Corp. (IBM ): Reiterates 5 STARS (strong buy)

Analyst: Megan Graham-Hackett

Bloomberg News, citing unnamed sources, reported that IBM's sale of its PC unit to China-based Lenovo Group has raised some security concerns by members of the Committee on Foreign Investments in the U.S. The risk concerns a North Carolina IBM facility from which Chinese operatives could launch industrial espionage. Approval by the committee is required for the deal to be completed without a formal investigation. Based on available information, we don't see the deal derailed at this point. We still view IBM as attractive with shares trading below peers on price-to-sales basis.

Hewlett-Packard (HPQ ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Today's Wall Street Journal reports that Hewlett-Packard's board is considering a management reorganization. Under the plan, Chairman and CEO, Carly Fiorina, would cede some management responsibilities to three key executives, giving them more autonomy over key operating units. We believe these executives could include Anne Livermore, EVP of Technology Solutions, VJ Joshi, EVP of Imaging & Printing, and potentially Mike Winkler, EVP of Customer Solutions and Marketing. While shares trade below the peer average on price-to-sales basis, we view them as fairly valued given operational challenges we see and recent execution misses.

Johnson & Johnson (JNJ ): Reiterates 4 STARS (buy)

Analyst: Robert Gold

J&J suspends clinical trials evaluating Reminyl for mild cognitive impairment, a condition which is often an early indicator of Alzheimer's. Reminyl is currently approved to treat mild-to-moderate Alzheimer's. The decision followed the death of 15 patients of 2,000 enrolled in the trials, vs. five deaths in patients taking a placebo. Even though we do not anticipate that the drug will be withdrawn from the market, and Reminyl is only a modest sales contributor to J&J, we are concerned about the impact on potential demand. We are leaving our 2005 earnings per share estimate at $3.35.

Marsh & McLennan (MMC ): Reiterates 3 STARS (hold)

Analyst: Gregory Simcik, CFA

The Connecticut Attorney General files a civil suit against Marsh & McLennan and ACE Ltd. alleging unfair/deceptive trade practices related to contingent commissions paid to Marsh & McLennan in connection with its services to Connecticut in the award of a state insurance contract to ACE. The attorney general intends to file similar actions involving other companies and consumers. We think the news may complicate and further delay a broad settlement between Marsh & McLennan and authorities over contingent payments and could increase the scrutiny on certain payments to brokers for other services rendered to insurers.

Qwest Communications (Q ): Downgrades to 2 STARS (sell) from 3 STARS (hold)

Analyst: Todd Rosenbluth

We believe that Qwest's results will prover weaker than Bell peers, which all report this week. We believe that the lack of its own wireless offering and our projection of only modest long-distance service growth should keep Qwest's EBITDA margins of 25% from widening to the level achieved by its peers. On Feb. 15, we see Qwest reporting a loss per share of 14 cents, vs. a year-ago loss of 17 cents. Qwest is trading above our 12-month target price of $4, based on its ratio of enterprise value to EBITDA. Lacking the support of a dividend, we would sell the shares.

Eaton Corp. (ETN ): Reiterates 2 STARS (sell)

Analyst: Robert Friedman, CPA

This $10 billion-revenue industrial components maker posted 61% higher fourth-quarter GAAP earnings per share of $1.16, vs. 72 cents, but lower than our $1.18 estimate. On an S&P Core earnings per share basis, fourth-quarter growth was only 31%, as Eaton posted 94 cents, vs. 72 cents. Fourth-quarter results were primarily driven by, in our view, strong volume sales growth in three out of four of the company's segments. Looking at long-term financial prospects, we are forecasting respectable 7.5% 10-year free cash flow growth rates and 15% return-on-equity. However, Eaton is trading at a sizable premium to our discounted-cash-flow-based $50 12-month target price.

Monsanto (MON ): Downgrades to 1 STAR (strong sell) from 2 STARS (sell)

Analyst: Andrea West

Monsanto announced a definitive agreement to acquire Seminis Inc., a global leader in the vegetable and fruit seed industry, pending regulatory approvals. The price would be $1.4 billion cash and assumed debt, plus a performance-based payment of up to $125 million. The company reduces its fiscal 2005 (ending August) GAAP earnings per share guidance to 86 cents to $1.06 from $1.56 to $1.71, assuming consummation of acquisition, but maintains its pro-forma earnings per share guidance of $1.85 to $2.00. If it is consummated, we see newly proposed Seminis acquisition, pending approvals, providing little near-term benefit to Monsanto, other than revenue growth, since we think its business has margins and growth prospects similar to Monsanto's. We also caution investors against excessive reliance upon non-GAAP pro forma earnings, which may obscure the impact of Monsanto's numerous special charges on profitability. We are increasing our fiscal 2006 estimate of ongoing operating earnings per share to $2.25 from $2.22 and our target price to $45 from $43, based on blend of updated discounted-cash-flow and relative value models.

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