S&P Downgrades Verizon Shares

Plus: An upgrade of Abercrombie & Fitch, and analyst comments on P&G, Leggett & Platt, Maytag, and others

Verizon Communications (VZ ): Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Todd Rosenbluth

We believe that Verizon's wireless operations will be a driver of near-term results. We also expect that the pending acquisition of MCI (MCIP ) will help Verizon to compete nationally with a broad suite of offerings by early 2006. However, we think investment sentiment has shifted, in our opinion, to the risks related to cable competition, DSL price cuts and Verizon's aggressive capital spending efforts for fiber and wireless broadband. As such, we are lowering our 12-month target price by $5 to $37.

Abercrombie & Fitch (ANF ): Upgrades to 5 STARS (strong buy) from 4 STARS (buy)

Analyst: Marie Driscoll, CFA

At 15 times our fiscal 2006 (ending January) EPS forecast, and 12 times our fiscal 2007 estimate, or an approximate 20% discount to its industry peers, we see Abercrombie shares as significantly undervalued. Despite the recent departure of COO Bob Singer and a truncated international effort, we believe A&F is on track for an EPS growth rate of 18% for the next five years. Moreover, we regard the brand's aspirational luxury positioning as a plus in any potential consumer spending contraction scenario. Our target price is $75, down from $80, reflecting reduced relative valuations but representing a 20% premium to its peers based on fiscal 2007 estimates.

Procter & Gamble (PG ): Reiterates 5 STARS (strong buy)

Analyst: Howard Choe

P&G addressed concerns that it will fall short of its September quarter earnings per share guidance of 75 cents to 76 cents, stating that, despite the disruption to its coffee operations by Hurricane Katrina and higher input costs, the company expects to meet its earnings per share expectations. We think P&G's strong sales in the beauty and health care segments and developing markets have provided the cushion. This underscores our view that the company's strong and diverse businesses, as well as its vast geographic reach, make it one of the most attractive consumer staples names. We view P&G as undervalued, trading in line with its peers.

Leggett & Platt (LEG ): Maintains 3 STARS (hold)

Analyst: Amy Glynn, CFA

Leggett & Platt cut its earnings per share guidance to 30 cents to 35 cents for the third quarter and $1.35 to $1.45 for 2005. Major factors include higher raw material and energy costs, and lower-than-expected sales volume. Leggett & Platt plans to consolidate, close or divest 20 to 30 production or warehouse facilities to cut excess capacity, as an expected bounceback in demand has not materialized. We see improving margins over time, but are concerned about lack of volume growth. We cut our third quarter earnings per share estimate to 33 cents from 40 cents, 2005's to $1.43 from $1.56, and 2006's to $1.64 from $1.75. Our target price falls by $5 to $25, 15 times our 2006 earnings per share estimate.

Maytag (MYG ): Reiterates 3 STARS (hold)

Analyst: Amy Glynn, CFA

Maytag guides 2005 operating earnings per share significantly below its 55 cents and 65 cents prior forecast due to higher costs, including manufacturing overhead and distribution, fuel and other raw materials costs. Maytag also says it will no longer give guidance. Our third quarter estimate falls to a 5 cents loss from 15 cents earnings per share; our full 2005 earnings per share estimate falls to 12 cents from 51 cents. Maytag trades at a sizable discount to the $21/share bid from Whirlpool (WHR ), due, we think, to uncertainty of timing and regulatory concerns. Our target price stays $21, but we think it unlikely the merger will close in the first quarter of 2006, as forecast by Maytag.

Estee Lauder (EL ): Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Howard Choe

Due to the effects of Hurricane Katrina and lower consumer spending, Estee Lauder believes that the first half of fiscal year 2006 (ending June) earnings per share will be below last year's first half. Despite this, Estee Lauder has kept its fiscal year 2006 earnings per share estimate of $1.95 to $2.00. We view this as an aggressive target and are lowering our fiscal year 2006 earnings per share estimate to $1.86 from $1.98. While we are optimistic about Estee Lauder's new product pipeline, we are less sanguine on consumer spending. Our 12-month target price falls to $42 from $46, reflecting a calendar p-e of 21 times, closer to peers. Given lower visibility, we would not add to positions in the stock.

Tempur-Pedic International (TPX ): Maintains 4 STARS (buy) Opinion

Analyst: Amy Glynn, CFA

Shares are down about 20% in pre-market trading after Tempur-Pedic reduced its 2005 sales and earnings per share guidance. We note that growth is still robust, given revised guidance of sales growth of 23% to 25% and earnings per share growth of 28%-30%, but this news follows second quarter results that also disappointed the Street, heightening concerns about increased competition in this rapidly growing niche. The company cites slow industry sales, possibly due to attractive auto incentives, negative consumer sentiment, high gas prices and lost sales due to Hurricane Katrina. We are putting our estimates under review.

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