S&P: Still Hold Sun Microsystems

Analyst Megan Graham-Hackett says Sun's restatement will have a minor impact to EPS. Plus: analyst comments on Genentech, Church & Dwight, Pfizer, Sprint, and more

Sun Microsystems (SUNW ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Sun Microsystems said in its 10-K filing that it restated certain financial results, which resulted in what we view as a minor impact to earnings per share, and no impact to revenues, operational profits or cash flows. We note that the error was discovered by internal controls, and related to certain tax accounting treatments. The fiscal year 2003 (ended June) restatement resulted in the company's earnings loss narrowing by 1 cent per share to $1.06, and the fiscal year 2005 loss widening by 1 cent to 3 cents, while fiscal year 2004 numbers were unchanged. We are keeping our fiscal year 2006 earnings per share estimates at 5 cents. With shares trading at p-s of 1.3 times, in line with the peer average, and with the company's cash investments of $7.4 billion, we view Sun Microsystems as worth holding.

Genentech (DNA ): Reiterates 4 STARS (buy)

Analyst: Frank DiLorenzo, CFA

The Food and Drug Administration panel recommended approval of Tarceva to be used in combination with gemcitabine to treat advanced pancreatic cancer. We expect Genentech and its partner OSI Pharmaceuticals (OSIP ) to gain Food and Drug Administration approval by November 2. Genentech also released positive interim Phase III data showing that Herceptin reduces risks of disease recurrence in early-stage breast cancer patients. The company plans to file a supplemental BLA in the first quarter of 2006 to expand Herceptin's use to include this indication. We still see 2005 earnings per share of $1.18 and 2006 earnings per share of $1.66. Our 12-month target price remains $100.

Church & Dwight (CHD ): Reiterates 4 STARS (buy)

Analyst: Howard Choe

Church & Dwight has agreed to acquire Procter & Gamble's (PG ) SpinBrush toothbrush business for approximately $100 million. Given the leadership position of the SpinBrush brand, we view the deal price, at less than 1 times sales, as attractive. We believe this transaction will bolster Church & Dwight's growing oral care portfolio. The financing terms have not been disclosed but, should Church & Dwight issue additional debt to finance the deal, we project that the company's debt/equity ratio will rise to about 1.3, still below peers and, in our opinion, very manageable on a cash flow basis.

Health Care Facilities Sub-Industry: Reiterates Positive Outlook

Analyst: Cameron Lavey

Based on comments from a recent investor conference, we remain positive on this sub-industry. While we think patient volumes at acute care facilities were weak in July, we expect stronger results in August and September. We believe that damage from Hurricane Katrina is likely to have a slightly negative impact in the short term, but it does not alter the sub-industry's underlying fundamentals, in our view. We would buy rural providers Community Health Systems (CYH )and LifePoint Hospitals (LPNT ), but we would sell Tenet Healthcare (THC ) on our view of company-specific problems.

Sprint Nextel (S ): Maintains 4 STARS (buy) Opinion

Analyst: Kenneth Leon, CPA

One of the first telecom service providers to estimate its financial impact from Hurricane Katrina, Sprint sees $150 million to $200 million in added costs over the balance of 2005. It expects these costs to be incurred by year-end, and has already restored wireless services in most states affected. We expect Sprint to release its historical financials soon to reflect the combined companies following the merger that closed last month. We will introduce new 2005 and 2006 earnings per share estimates at that time. We're expecting Sprint shares to be priced near their peers by the market, although the company is growing faster, so we find its shares attractive.

Gillette (G ): Reiterates 3 STARS (hold) Opinion

Analyst: Howard Choe

Gillette introduced the Fusion 5-bladed razor system today. Aside from the 5 blades, the razor has a trimmer for the 50% of males sporting facial hair. Gillette focus groups preferred the Fusion 2-to-1 over the Mach3 system. Should consumers react similarly, we anticipate Mach3 users to trade up at a healthy rate. The razors will be sold at prices in line with the latest Mach3 models, but the blades will sell for about a $1 more. We expect this launch will extend Gillette's lead in wet shaving, based on a likely consumer trade-up, and will provide a greater return on investment than the Mach3 franchise.

Pfizer (PFE ): Reiterates 3 STARS (hold) Opinion

Analyst: Herman Saftlas

Pfizer purchased Vicuron, an R&D firm focused on anti-infectives, for $1.9 billion cash. We see this as a strategic move for developing new biotech products to replace COX-2 losses and impending patent expirations on several key drugs. Recent pipeline news has been mixed, with positive news on Aromasin anticancer and Exubera inhaled insulin, offset by a Food and Drug Administration rejection of Oporia for osteoporosis. Our 12-month target price remains $29, which applies a discount-to-peers p-e of 13.3 times to our 2006 earnings per share estimate. We think this p-e is reasonable in view of pipeline and Lipitor litigation risks.

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