S&P Ups Verity, Cuts State Street and Lehman

Plus: Analyst opinions on Washington Post, Unilever, Total, and other stocks Friday

Verity (VRTY ) : Ups to 3 STARS (hold) from 1 STAR (strong sell)

Analyst: Scott Kessler

Verity announced its proposed acquisition by Autonomy (AUTNF.PK ) in a transaction valued at some $507 million, or $13.50 cash per share. We are surprised by the announcement, given what we view as increasing competition in Verity's markets, the company's recent inconsistent execution, and the stock's premium relative valuation. Pending necessary approvals, we expect the planned transaction to be consummated by early 2006. We are raising our 12-month target price to $14 from $8.

State Street (STT ) : Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Mark Hebeka, CFA

We believe State Street is still well diversified and has strong fundamentals, but we currently see it as overvalued. We are encouraged by expense discipline and look for the company to continue repositioning its balance sheet. We anticipate revenue growth through business wins and expanded service to existing clients in the coming quarters. We are maintaining our 2005 operating earnings per share estimate of $2.81, and our 2006 estimate of $3.15. We are lowering our 12-month target price to $52 from $54, about 16.5 times our 2006 earnings per share estimate, more in line with asset management and custody bank peers.

Lehman Brothers (LEH ) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Robert Hansen, CFA

After the 40% gain in the shares so far in 2005, there is less upside to our 12-month target price, which remains $130. We think Lehman has demonstrated impressive revenue and earnings per share growth in recent years; however, we see more similarities than differences with its closest peers. Further, we think Lehman could trade at a discount to its average multiple of 12 times, as we see slower growth in fiscal year 2006 (ending November). We are raising our earnings per share estimates to $10.50 from $10.25 for fiscal year 2005 (ending November), and to $11.00 from $10.50 for fiscal year 2006. Although we like Lehman's fundamentals, we view the shares' valuation as appropriate.

Washington Post (WPO ): Reiterates 2 STARS (sell)

Analyst: J. Peters, CFA

Third quarter EPS of $7.54, vs. $8.57 one year earlier, misses our estimate by 27 cents. Results are before $1.17 of Hurricane Katrina-related losses, and 54 cents in securities sales gains. Revenues grew 6.5%, led by a 24% advance in education, while cable, TV and magazine revenues declined. Despite our expectation of continued strong growth in education, we expect segment margins to expand more slowly than originally anticipated as the company invests in the business. We are lowering our 2005 and 2006 EPS estimates to $31.99 and $38.48, from $33.07 and $41.06, and trimming our 12-mo. target price to $750 from $775.

UGI (UGI ) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Yogeesh Wagle

We are raising our fiscal year 2006 (ending September) earnings per share estimate by 8 cents to $1.97, 8.8% higher than our $1.81 fiscal year 2005 estimate. We think UGI will continue to grow earnings through a mix of small acquisitions and customer additions. We see international operations offering greater opportunities as the company invests in faster-growing East European countries. We think UGI should also achieve 10% to 12% growth in its domestic propane business through well-controlled operating expenses and price hikes. We are raising our target price by $3 to $29, based on a forward p-e of 14.7 times, in line with peers.

Total (TOT ): Reiterates 5 STARS (hold)

Analyst: Tina Vital

Totla posted third quarter operating earnings per ADS of €3.13 billion, vs. €2.4 billion, on high oil prices and strong refining margins. Results missed our estimate by €1.49 billion, reflecting narrowed retail marketing and petrochemical margins, and increased operating costs. Hydrocarbon production declined 2.1%, below our expectations on reduced production, primarily reflecting the impact of high oil prices on entitlements. We are reducing our 2005 earnings per ADS estimate by $2.36 to $13.19 and 2006's by $3.65 to $11.58. Our 12-month target price stays $144, based on blend of discounted cash-flow analysis and peer multiples.

Unilever PLC (UL ): Reiterates 4 STARS (buy)

Analyst: S. Mahamkali

Before charges, Unilever posted third quarter earnings per ADR of 69 cents, vs. 87 cents, 10 cents below our estimate. Underlying sales growth of 3.5% was better than our 3.0% projection, largely on strong emerging markets. But profitability was below our expectations, limited by higher advertising and promotion expense in frozen foods. We are lowering our 2005 earnings per ADR estimate to $2.69 from $2.86 to reflect lower third quarter results and currency translations. We believe Unilever's sales recovery is on track and that margins will stabilize in Europe. We view the ADRs as attractive at a p-e of 15 times our 2005 estimate, a 15% discount to peers.

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