S&P Keeps Hold Opinion on Merck

Analyst Herman Saftlas believes the drug maker can manage Vioxx liabilities. Plus: opinions on Northwest Airlines, Eyetech, and more

Merck (MRK ): Reiterates 3 STARS (hold)

Analyst: Herman Saftlas

Citing strong defenses, Merck plans to appeal Friday's $250 million jury award in its first Vioxx liability case. Even if Merck loses, we think punitive damage caps will probably reduce the award to $26 million. We believe Merck's $14 billion in cash and investments should enable it to manage Vioxx liabilities, plus maintain its $1.52 dividend. But we think the stock will trade near current levels over the foreseeable future, given ongoing Vioxx litigation and modest expected earnings per share attrition over 2005-2008. Our target price falls by $7 to $28, applying a discount-to-peers' p-e of 11.5 to our 2006 EPS estimate.

Northwest Airlines (NWAC ): Reiterates 1 STAR (strong sell)

Analyst: James Corridore

Northwest shares were trading up over 7% this morning, we think likely due to it suffering only minimal disruption from the mechanics strike. We don't believe investors are seeing the full picture at Northwest right now. We see the strike as likely to hurt Northwest if it continues, and even if it is able to attain all its goals from mechanics, we don't think it will be enough to offset high oil prices. After mechanics, Northwest still has to proceed to flight attendants and pilots. We expect investors to eventually focus on the overall problems at Northwest, and we reiterate our 12-month target price of $3.

Eyetech Pharmaceuticals (EYET ): Maintains 3 STARS (hold)

Analyst: Phillip Seligman

Eyetech agrees to be acquired by OSI Pharmaceuticals (OSIP ). Slated to close year-end 2005, pending necessary approvals, the deal calls for each Eyetech share to be exchanged for $15 cash and 0.12275 OSI shares, totaling $19 based on OSI's recent price. Still seeing Eyetech's Macugen losing market share to Genentech's (DNA ) Lucentis, assuming FDA approval, we think the deal gives Eyetech holders adequate cash return and opportunity to participate in a more-diversified company. Our 12-month target price rises by $3 to $18, assuming tax impact on the cash portion of the deal.

Emmis Communications (EMMS ): Maintains 3 STARS (hold)

Analyst: Gary McDaniel

Emmis announces the sale of 9 of its 16 TV stations for an aggregate of $681 million. The 9 stations comprised 53% of Emmis' $120.4 million TV operating income in fiscal year 2005 (February); applying the 12.4 multiple represented by the sale announced today would value the remaining stations at $604 million. The possible total sale value for the 16 stations would then be $1.28 billion, at the high end of the $1.0 billion to $1.3 billion we estimated on May 10 that the stations would sell for. We expect Emmis, which added $395 million in debt to fund an offer for 35.6% of its shares in June, to use a portion of the proceeds to pay down debt.

Alpharma (ALO ): Upgrades to 3 STARS (hold) from 2 STARS (sell)

Analyst: Herman Saftlas

Alpharma says it is actively considering strategic alternatives to maximize shareholder value. We think its owners in Norway may be considering the sale of all or parts of Alpharma in view of valuations seen during recent takeovers in the generic sector. An unconfirmed story by Dow Jones says that Indian drugmakers Ranbaxy and Wockhardt have made bids for stakes in Alpharma. While we believe Alpharma should be valued below peers, based on products and pipeline, we think its present market cap at 1 times sales appears attractive. Our target price rises by $7 to $26, based on revised discounted cash flow assumptions.

Google (GOOG ): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

According to a confirmed report from the Wall Street Journal, Google has expanded its Google Desktop Beta to include Sidebar, which offers access to personalized content such as e-mail, news, weather, photos, and stocks. It also includes Scratch Pad, which allows for note-taking. We believe Sidebar is part of the competitive battle involving Google, Microsoft (MSFT ), and Yahoo (YHOO ). We think it is obviously directed at My Yahoo, and WSJ opines it could be the beginning of a future assault on Microsoft's Office, even though we see this is a premature assessment.

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