S&P Keeps Hold on Gillette

CheckFree gets downgraded to hold, plus analysts' opinions on EMC, Harrah's, and more

Gillette (G ): Reiterates 3 STARS (hold)

Analyst: Howard Choe

Gillette posts second-quarter earnings per share of 49 cents, vs. 42 cents, 1 cent above our estimate. Sales grew 13%, driven by new products and consumer trade-ups to premium products. Given raw material inflation, we were glad to see gross margin compression slow sequentially, and operating margin expand by 100 basis points, on improved mix and lower overhead. We think these results are very impressive, given tough comps and merger-related activities. We are raising our 2005 EPS estimate to $1.93 from $1.91, and we see Gillette as fairly valued at a p-e-to-growth ratio of 1.7, in line with peers.

CheckFree (CKFR ): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Zaineb Bokhari

June-quarter operating earnings per share of 39 cents, vs. 30 cents, is 1 cent above our estimate. Revenues grew 6.2% to $203 million, $3 million above our forecast due to higher software sales. E-Commerce revenue grew 29%, aided by 32% subscriber growth and modest price erosion. Our fiscal year 2006 (June) EPS estimate stays $1.54. We see E-Commerce growth slowing in the second half of fiscal year 2006 as a high-margin contract expires. We expect strong software sales to help offset this loss. We are raising our discounted cash flow-based target price by $3 to $42. Our downgrade is based on valuation, as we see shares offering limited upside to our target.

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

Analyst: Richard Stice, CFA

At today's analyst meeting, EMC emphasized its new product portfolio and increasing focus on storage security as ways in which it is broadening its information lifecycle management strategy. We continue to be encouraged by the company's execution, market-share gains and capital structure, as it has recently accelerated the number of share repurchases. We further believe that the overall storage industry will remain a major spending priority for corporate IT departments over at least the next one to two years. Our 12-month target price is $18.

Harrah's Entertainment (HET ): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Tom Graves, CFA

Before special items, second-quarter earnings per share from continuing operations of 88 cents, vs. 73 cents, is 3 cents below our estimate. We are lowering our 2005 EPS estimate to $3.40 from $3.58 and 2006's to $3.70 from $4.00, which still assumes 20 cents negative impact from option expensing. Our 12-month target price remains $85, which is based on a p-e of 23 times our forecasted 2006 EPS, similar to what we expect for peers MGM Mirage (MGM ) and Boyd Gaming (BYD ). After recent dividend hike, Harrah's shares have an indicated 1.9% yield. However, we do not see enough upside to advise purchasing Harrah's shares.

Dillard's (DDS ): Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analyst: Jason Asaeda

Same-store sales were up 2% in July, beating our projected 1% decline. While an inconsistent sales trend over the past six months suggests to us that Dillard's merchandising and marketing need further tweaking, we think that fundamentals should improve in the second half of fiscal year 2006 (January), aided by somewhat easier sales comparisons. We are raising our fiscal year 2006 (January) EPS estimate by 5 cents, to 85 cents, on projected expense leverage on modest same-store sales growth. We are raising our 12-month target price by $2 to $24 on our updated discounted cash flow and p-e models.

Devon Energy (DVN ): Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: Charles LaPorta

Devon Energy reports second-quarter earnings per share of $1.38, vs. $1.00, exceeding our estimate of $1.20 on higher-than-expected Canadian production. We believe positive production momentum will continue in Canada and the mid-continent U.S. Recent divestitures have significantly lowered DD&A costs, and proceeds have been used to complete a 50 million share repurchase. Devon has authorized another 50 million share program. We are increasing our 2005 and 2006 EPS estimates to $5.80 and $6.60 from $5.00 and $5.30. We are also raising our 12-month target price by $10, to $65, reflecting a p-e of 11.2 times our 2005 estimate, in line with peers.

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