S&P Raises UnitedHealth to Strong Buy

Analyst Phillip Seligman is encouraged by the outfit's rising margins. Also: Analyst comments on eBay, Ericsson, and others

UnitedHealth Group (UNH ) : Ups to 5 STARS (strong buy) from 3 STARS (hold)

Analyst: Phillip Seligman

UnitedHealth Group reported third quarter earnings per share of 64 cents vs. 52 cents, 1 cent above our estimate. Though we are lowering our 2005 operating earnings per share estimate, before reserve development, by 3 cents to $2.32, we are encouraged by adjusted third quarter operating margin growth of 9.7% vs. 6.6%. Our 2006 earnings per share estimate remains $2.90 excluding the impact of the Medicare drug program and planned PacifiCare (PHS ) acquisition; we see $3.35 in 2007. On our view of improved prospects, assuming the PacifiCare acquisition, our 2007 p-e estimate rises to 21 times from our 2006 above-peer 20 times estimate, and our 12-month target price rises by $12 to $70.

eBay (EBAY ): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

The company completed the acquisition of Internet telephony outfit Skype for $2.5 billion in cash and stock and up to $1.4 billion in a performance-based earnout payable in 2008 and/or 2009. eBay expects the transaction to dilute fourth quarter EPS by 1 cent and 2006's by 4 cents. We are maintaining our EPS forecasts of 83 cents for 2005 and $1.00 for 2006. Although we see substantial potential in Skype, we believe eBay paid too much for the company and do not think it is particularly strategic to eBay's businesses. The company is set to report third quarter results after the close of trading Oct. 17, and we project revenues of $1.1 billion and EPS of 20 cents.

LM Ericsson ADSs (ERICY ) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Inger Soderbom

Our downgrade is based primarily on valuation, since the stock price is near our 12-month target price of $37. We also see risk in any potential deal to buy troubled U.K. wireline operator Marconi, per unconfirmed British media reports. Ahead of Ericsson's third quarter report, scheduled for 10/21, we forecast earnings per American Depositary Share of SEK 0.36, above the Street's SEK 0.35. However, we believe Ericsson will provide a cautious initial outlook for the 2006 mobile systems market. Looking ahead, we project Ericsson's sales growth decelerating to 8% in 2006 from the 13% that we estimate for 2005.

GlaxoSmithKline ADRs (GSK ): Reiterates 4 STARS (buy)

Analyst: S. Matsubara

Boosted by an ambitious expansion program, GSK should be able to triple its flu vaccine market share in volume by 2008, in our view. We consider this very timely, given heightened concern over avian flu and recent Senate approval of $3.9 billion to combat that disease. We see GSK's U.S. flu business benefiting from the recent purchase of a flu business in Pennsylvania, and FDA approval of the Fluarix vaccine. Our 12-month target price rises by $1 to $54, based on a blend of our discounted cash-flow and peer group multiple-based comparisons. We expect GSK to maintain its 3% dividend yield.

Waters (WAT ) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Jeffrey Loo, CFA and Cameron Lavey

Waters downwardly revised its third quarter sales growth guidance to 3% from 8%, and its earnings per share forecast to 43 cents from 47 cents. We are adjusting our model and estimates, also lowering our third quarter sales growth forecast to 3% from 8%, and reducing our earnings per share estimate to 43 cents from 48 cents. We are surprised by the shortfall, in light of what we view as strong second quarter results. In addition, we are concerned by weakness in U.S. sales, particularly to large pharmaceutical accounts, and we see these trends continuing. We are cutting our 12-month target price to $41 from $50 on revised discounted cash flow analysis.

Exelon (EXC ) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Justin McCann

Our target price falls $1 to $54, but we see a recent drop in Exelon stock as a good opportunity to buy. Shares were hurt, we think, by a decline in electric stocks and uncertainties over Exelon's ComEd unit, with the Ill. governor trying to block rate hikes after the current freeze ends at the end of 2006 and the utility having to buy power at market prices. Even if ComEd were forced into bankruptcy, we see limited impact on Exelon. There are no cross-defaults, and we see ComEd's contribution to total operating income falling from about 25% to 15% in 2007, as the generation business rises to 65% from 50%.

Public Service Enterprise Group (PEG ) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Justin McCann

In light of the recent decline in the shares of both Public Service Enterprise Group and Exelon (EXC ), we believe Public Service Enterprise Group stock has become attractive on a total return basis. We still expect the merger of Public Service Enterprise Group and Exelon to close by the end of the first half of 2006, pending necessary approvals. Today, we lowered our target price for Exelon by $1 to $54, thus we are cutting our target price for Public Service Enterprise Group by $2 to $64. With Public Service Enterprise Group shareholders to receive 1.225 shares of Exelon for each Public Service Enterprise share, this would reflect the approximate projected value of about $52 for Exelon shares at the time of the expected merger closing.

A.O. Smith (AOS ) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: John F. Hingher, CFA

A.O. Smith posted third quarter earnings per share of 39 cents before charges, vs. 10 cents, above the 32 cents we and the Street expected. Results benefited from better sales than we projected in the water systems business, as wholesale inventory levels returned to normal and sales in China rose 50%. Given our forecast of continued moderate economic expansion, and cost savings from A.O. Smith's redeployment of production to low-cost regions, we are raising our 2005 earnings per share estimate to $1.76 from $1.65 and 2006's to $2.10 from $1.95. We are also boosting our 12-month target price to $32 from $25, and now view A.O. Smith as suitable to hold.

Cumulus Media (CMLS ) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: James Peters, CFA

While we continue to expect national advertising to remain weak through the third quarter, we anticipate improvement towards the end of 2005 and into 2006 as Cumulus Media's new national sales firm has an opportunity to sell the company's inventory and as the loss of a major national account in the first quarter 2005 cycles through in early 2006. With shares now trading below our target price, we are upgrading Cumulus Media based on valuation. Our 12-month price target remains $12, derived by applying a 12.2 times enterprise value/earnings before interest taxes debt and amortization multiple to our 2005 earnings before interest taxes depreciation and amortization estimate of about $105 million.

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