S&P Downgrades Target

Analyst Jason Asaeda points to the retailer's widening valuation. Plus analysts' opinions on Oracle, American International Group, and more

Target Corp. (TGT ): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Jason Asaeda

Target shares are approaching our 12-month target price of $57. We continue to project 11% sales growth for fiscal 2006 (ending January), driven by improved in-stock levels, merchandising differentiation, and a stronger value message, which we see supporting increased customer shopping frequency. Coupled with our expectation of margin improvement on better inventory management, partly offset by expenses related to sourcing initiatives, we look for Target to sustain its strong earnings momentum over the balance of the fiscal year. Our fiscal 2006 earnings per share estimate remains $2.59.

Oracle (ORCL ): Reiterates 4 STARS (buy)

Analyst: Jonathan Rudy, CFA

Oracle posted May-quarter operating earnings per share of 26 cents, vs. 19 cents, 4 cents better than our estimate. Revenues of $3.88 billion also beat our $3.85 billion forecast. Applications revenues doubled and database/middleware revenues rose 12%. However, applications results benefitted from the recent acquisitions of PeopleSoft and Retek. We are increasing our fiscal 2006 (ending May) operating earnings per share estimate to 78 cents from 76 cents. With the company's strong execution, in our view, and the stock trading at a discount to peers on p-e and p-e-to-growth metrics, we believe shares of this database market leader remain attractive.

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

Analyst: Catherine Seifert

First-quarter operating earnings per share of $1.38, vs. 94 cents beats our $1.32 estimate. Results include FAS 133 gain of 17 cents, vs. a one-cent first-quarter 2004 loss. We are encouraged by results but still see some execution risk. Property/casualty net written premium grew 7.6%, above the industry average but below AIG's historical growth at this point in the cycle. Overseas life results were strong, but we think certain ratings-sensitive lines may struggle near term. We are lowering our 2005 earnings per share estimate by 20 cents to $5.00. We see $5.50 in 2006. Our target price is $64, a peer average of 11.6X our 2006 earnings per share estimate.

Applied Materials (AMAT ): Maintains 4 STARS (buy)

Analyst: Colin McArdle

Applied Materials agrees to acquire SCP Global Technology's single-wafer HF-last immersion technology and other intellectual property for an undisclosed price. We continue to believe that bolt-on technology acquisitions are one of several accretive uses of Applied Material's large cash balance. In our opinion, this planned purchase strengthens Applied Material's current wet-cleaning product offering, and cross-selling opportunities appear significant. We believe the deal will be completed some time during the next quarter and are maintaining our fiscal 2005 (ending October) earnings per share estimate of 69 cents.

Monsanto (MON ): Reiterates 1 STAR (strong sell)

Analyst: Andrea West, CFA

Monsanto reported May-quarter earnings per share of 17 cents, vs. 93 cents. Operating earnings per share from continuing operations of $1.06, before a write-offs of in-process research and development, is above our $1.05 forecast. Revenues rose 22%, on acquisitions and 10% core business growth. On weaker than expected company guidance on profitability, we are revising our forecasts for operating fiscal 2005 (ending August) earnings per share to $2.05 from $2.18, and our fiscal 2006's to $2.36 from $2.41. We are adjusting our 12-month target price to $50 from $48, blending our updated discounted-cash-flow model, and our relative valuation model for a target of forward price 2.4 times sales.

SBC Communications (SBC ): Maintains 3 STARS (hold)

Analyst: Todd Rosenbluth

According to an unconfirmed Wall Street Journal report, SBC plans to more aggressively compete with cable companies this week by offering free DSL and satellite service for three months to customers that cancel service from their cable provider. We see this expected move by SBC, which lost 4.4% of its local phone lines in the year ended March 2005, as a continuation of its approach to try to improve longer-term customer loyalty, regardless of the short-term EBITDA margin implications. Even with the company's below-peer margins, we would hold the shares for their total return potential.

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