S&P Cuts Telecom Services Sector

Also: comments on E-Trade's plans to buy JP Morgan's online brokerage, a downgrade of Forest Labs, and more analyst opinions

Telecom Services Sector (BLS ): Cuts outlook to Underweight From Marketweight

Analyst: Sam Stovall

S&P recommends underweighting the S&P 500 Telecommunications Services sector. In addition to a weakening technical environment, S&P analysts are concerned that large integrated services providers may only see modest free cash flow generation due to pressure from increased competition, capital outlays for fiber deployment and large acquisitions. Total access lines and revenues for the wireline companies have become restricted by competition from cable companies, and by wireless substitution. We also expect emerging threats to landline telecom carriers from pure VoIP providers.

JP Morgan Chase (JPM ) : Reiterates 4 STARS (buy)

Analyst: Mark Hebeka,CFA

JP Morgan announced today a definitive agreement to sell BrownCo, its online deep discount brokerage business to E-Trade Financial (ET ) for $1.6 billion in cash, pending approvals. JP Morgan expects the deal to close by year-end and will recognize a $700 million after tax gain. We view this as a relatively small event for JP Morgan and believe it is following the growing trend of reducing non-core businesses. We continue to see JP Morgan as a global player with attractive valuation. Our 2005 and 2006 operating earnings per share estimates stay $2.95 and $3.30, and our target price remains $43.

Forest Laboratories (FRX ) : Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Herman Saftlas

Forest Laboratories is dealt a major setback, as pivotal Phase III trial results on milnaciprin for fibromyalgia failed to meet primary endpoint goals. Although the company plans to continue development, we think that, even if additional studies are favorable, milnaciprin filings will probably be delayed until late calendar 2007, creating a large pipeline gap. Forest Lab's Lexapro antidepressant continues to gain market share. But that drug (estimated at over 60% of fiscal year 2006 (ending March) sales) faces a major patent trial to start in early December. Our target price falls by $17 to $32 on revised discounted cash flow assumptions.

Kerr-McGee (KMG ) : Cuts to 4 STARS (buy) from 5 STARS (strong buy)

Analyst: Charles LaPorta

Kerr-McGee provided mid-quarter guidance yesterday, lowering production forecasts to reflect the recent hurricanes. Its facilities suffered no significant damage. However, the storms also pushed out the conclusion of its Gulf of Mexico shelf properties and may affect the sale of chemical unit, which could compromise its debt reduction prospects. We are lowering our 2005 earnings per share estimate to $11.75 from $12.30. Lower production will likely restrict upside in results, since existing hedges take a greater portion of production. Our target price of $110 reflects a 9.4 times p-e, in line with peers.

Foot Locker (FL ) : Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Mark Basham

We think the company's weak July quarter sales have likely persisted into the October quarter. In the U.S., we think shifts in consumer spending patterns in response to high energy prices led to a more promotional pricing environment during the back-to-school period, and we expect these trends to continue through the holiday season. We are lowering our October quarter earnings per share estimate to 47 cents from 49 cents, and January quarter's to 53 cents from 55 cents, full fiscal year 2006 (ending January) to $1.65 from $1.69, and fiscal year 2007's to $1.60 from $1.65. Foot Locker shares are now more than 10% above our discounted cash flow-based target price, reduced $4 today to $19.

Borders Group (BGP ) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Amy Glynn, CFA

With Borders Group trading below our 12-month target price of $22, our upgrade is based on valuation. We still see a soft U.S. book and music business for the company in fiscal year 2006 (ending January), although we expect gradual improvement in remodeled stores to benefit fiscal year 2007 earnings per share. We also view positively Borders' continuing efforts to raise productivity of other merchandise categories, such as cafes, and gifts and stationery, but we see limited near-term payoff. Our respective fiscal year 2006 and fiscal year 2007 earnings per share estimates remain $1.65 and $1.88. With limited upside seen to our $22 target price, we recommend hold.

Ross Stores (ROST ) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Marie Driscoll, CFA

With most of its information technology problems seen resolved, 27% trailing 12 month return on invested capital versus 19% for apparel retail peers, and trading at a 10% discount to peers on fiscal year 2007 (ending January) estimates, we see potential upside for Ross shares. We see strong sales productivity as Ross laps year-ago problems, and think its value positioning should protect it if consumers cut spending. In our view, Ross remains a growth story with about 700 stores in 26 states, among other things. Our target price of $29, cut $2 today, represents a 10% premium to lower peer-group 2007 multiple.

Google (GOOG ) : Reiterates 3 STARS (hold) Opinion

Analyst: Megan Graham-Hackett

Google announced it will build a 1 million square-foot campus at the NASA Research Park at Moffet Field. The company and NASA plan to collaborate on several R&D efforts, such as large-scale data management, and bio-info-nano convergence. No terms were disclosed under the agreement, but we view this as a further example of new application areas capitalizing on what we view as Google's exceptional position in online search. Still, we are cautious on Google shares, given competitors' moves to expand in the online search market.

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