S&P Keeps Pfizer, Merck at Hold

Analyst Herman Saftlas also keeps his target prices on the Big Pharma stalwarts amid news on Celebrex and Vioxx. Plus: Opinions on Merck, AIG, and more

Pfizer (PFE ): Reiterates 3 STARS (hold)

Analyst: Herman Saftlas

Pfizer is higher today as the FDA panel votes to allow Celebrex COX-2 to remain on the market. Despite risks at high doses, panel members decided drug's benefits outweigh its risks. We think the decision should enable Celebrex prescriptions to rebound from their precipitous drop in February. However, we still expect Celebrex sales to fall some 40%, to about $2 billion, in 2005. While we expect more aggressive cost-cutting by Pfizer, we still project earnings per share to decline modestly in 2005. Our 12-month target price remains $27, applying a 13 times p-e, 15% below peers, to our 2005 earnings per share estimate.

Merck (MRK ): Reiterates 3 STARS (hold)

Analyst: Herman Saftlas

Merck may be considering returning Vioxx to market, based on new data indicating the drug may not have greater heart risks than other pain relievers, and its risk/reward may be favorable for many patients. While we think the odds of bringing back Vioxx are small, we believe new positive studies could help Merck in Vioxx litigation. However, the extent of liabilities remains uncertain. Merck also faces patent expirations on Zocor in 2006, and Fosamax in 2008. Our 12-month target price remains $31, based on forward p-e and discounted-cash-flow analyses and assumed continuation of $1.52 dividend payout.

Qwest Communications (Q ): Maintains 2 STARS (sell) MCI (MCIP ) Maintains 3 STARS (hold)

Analyst: Todd Rosenbluth In an 8-K filing, Qwest has disclosed a letter it sent to the directors of MCI advising them of plans to submit a modified offer to acquire MCI. Earlier this week, MCI agreed to accept a $20.75 per share offer from Verizon Communciations, pending approvals, rather than accept Qwest's offer of $24.60. We believe recent disclosures from Qwest are signs of the severe challenges we see the Bell facing as a standalone entity with a highly leveraged balance sheet and ongoing operating losses. Our 12-month target price remains $3.50 and we would sell Qwest shares.

American International Group (AIG ): Reiterates 4 STARS (buy)

Analyst: Catherine Seifert

We see AIG shares coming under pressure amid published reports that claim regulators are looking into a transaction between AIG and Berkshire Hathaway's General Re reinsurance unit that might be construed as an attempt to inflate loss reserves. We believe AIG has the financial resources to withstand any potential monetary impact from this probe, should one emerge. But the risk, in our view, is the loss of AIG's credibility or its top tier financial strength rating. Our $85 12-month target price assumes that these issues will be resolved soon.

Blockbuster (BBI ): Reiterates 2 STARS (sell)

Analyst: Amy Glynn, CFA

The board of Hollywood Entertainment recommends its shareholders reject Blockbuster's hostile buyout offer at $14.50, and reaffirms its previous recommendation that they accept the $13.25 offer from Movie Gallery. Hollywood says that uncertainties inherent in Blockbuster's offer outweigh the 9.4% premium it offers to Movie Gallery's bid, including antitrust issues and other conditions that could reduce likelihood of closing the transaction. We view the proposed transaction as currently structured as unfavorable for Blockbuster.

Fannie Mae (FNM ): Maintains 2 STARS (sell)

Freddie Mac (FRE ): Maintains 2 STARS (sell)

Analyst: Mark Hebeka, CFA

We think comments from Fed Chairman Greenspan that mortgage holdings for Fannie Mae and Freddie Mac should be limited will add more pressure to the current adverse environment. Greenspan suggested that mortgage holdings should be kept at about $100 billion to $200 billion each, compared to the current combined total of about $1.55 trillion. While we do not believe limiting mortgage holdings will hurt core businesses, we think it will hamper profitability. We are lowering our target price for Fannie Mae to $57 from $59, but keeping Freddie Mac's at $57.

Intuit (INTU ): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Intuit posted January-quarter earnings per share of 82 cents, vs. 77 cents, a penny above our estimate. Revenues rose 5%, besting our forecast by 4%, on gains in QuickBooks and consumer tax businesses, partly offset by a decline in professional tax. Despite a quarter we consider solid, we think Intuit needs to achieve revenue growth acceleration. To do so, it is committing resources to new initiatives we expect could pay off beyond fiscal 2005 (ending July). We are reducing our fiscal 2005 earnings per share estimates to $1.95 from $2.01, and fiscal 2006's to $2.22 from $2.31. We are lowering our discounted-cash-flow-based 12-month target price to $47 from $49.

ValueClick (VCLK ): Reiterates 5 STARS (strong buy)

Analyst: Scott Kessler

ValueClick posted fourth-quarter earnings per share of 16 cents, vs. 7 cents, 5 cents above our high-end estimate. Revenues rose 80%, benefiting from acquisitions, and were 15% above our projection. Organic growth was 49%. We believe ValueClick is benefiting from secular growth in online marketing, diversified offerings and revenue streams, and international expansion. Although ValueClick raised its 34 cents to 36 cents 2005 earnings per share guidance to 37 cents to 39 cents, we still think it is being very conservative. We are increasing our forecast to 48 cents from 45 cents. Our blended 12-month target price remains $17.

NetGear (NTGR ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Fourth-quarter earnings per share of 23 cents, vs. 14 cents is 2 cents above our estimate. Wider gross margins offset slower revenue growth than we had modeled, though revenues were limited by Los Angeles port traffic delays. While inventories were higher than we would like to see, this was mostly planned by NetGear ahead of a strong selling season and it expects to be at target level in the first quarter. Company guidance for first-quarter revenue and earnings per share is above our model and we are upping our 2005 earnings per share estimate by 10 cents to 96 cents despite a higher tax rate we see, to reflect wider margins. At price/sales near peers, we see NetGear fairly valued.

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