S&P Ups Guidant, Allergan and BJ's Wholesale Club

Plus: Cuts Gilead Sciences, Affordable Residential Communities, and Genentech

Guidant (GDT ) : Ups to 3 STARS (hold) from 1 STAR (strong sell)

Analyst: Robert Gold

Guidant and Johnson & Johnson (JNJ ) have announced a revised merger agreement under which each Guidant share would be converted into 0.493 shares of Johnson & Johnson plus $33.25 in cash. Based on the November 14 closing price of Johnson & Johnson, the revised deal values Guidant at about $63 per share, which is our new target price (up $15). The terms are down from the original $76 per share deal value. The agreement has already been approved by the Federal Trade Commission but remains subject to approval by Guidant's shareholders, and is expected to close during the first quarter of 2006, pending necessary approvals.

Allergan (AGN ) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Phillip Seligman

Allergan plans to acquire Inamed (IMDC ) for $3.2 billion in cash and stock, pending approvals. We see Allergan's offer as more likely to succeed than Medicis Pharmaceutical's (MRX ) due to the higher offer price, Allergan's more liquid stock (in our view), and the likelihood of less Federal Trade Commission scrutiny given Allergan's plan to divest Inamed's Botox-like Reloxin. We see the deal boosting Allergan's medical aesthetics market, cash flow and earnings per share over time, aided by significant synergies. Reflecting the shift in strategy we see, we are raising our 2006 target price by $7 to $112.

BJ's Wholesale Club (BJ ) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Joseph Agnese

October quarter operating earnings per share of 40 cents vs. 33 cents is 3 cents above our estimate. Results benefited from increased private-label and produce sales, and savings from global sourcing initiatives. Following a similar announcement by a competitor, BJ is raising its annual membership fees $5 beginning with renewals in Jan. 2006. We believe proceeds will be used to upgrade customer loyalty programs. Based on our estimate of 10 cents in stock option expense, we are adjusting our fiscal year 2007 (ending January) earnings per share estimate to $1.95 from $2.05. Our 12-month target price remains $34.

Gilead Sciences (GILD ) : Cuts to 4 STARS (buy) from 5 STARS (strong buy)

Analyst: Frank DiLorenzo, CFA

Shares have advanced solidly since August, and we think the upside is somewhat more limited. We believe prospects for the company's anti-HIV franchise are strong, but we are taking a more cautious stance after the solid share gains. Gilead anticipates filing for the approval of a new triple combo formula featuring its Truvada (Viread/Emtriva) and Bristol-Myers Squibb's (BMY ) Sustiva in the first half of 2006. We think a timely launch is necessary to meet our long-term growth view. We are raising our 12-month target price to $61 from $57.

Genentech (DNA ) : Cuts to 4 STARS (buy) from 5 STARS (strong buy)

Analyst: Frank DiLorenzo, CFA

We continue to like Genentech's long-term growth prospects. But we are downgrading shares on valuation, following a strong run-up after the price correction in late September. We think the company has a superior growth rate to comparables and leading clinical track record. Our forecasts assume $7.5 billion in peak annual U.S. sales of Avastin by 2012 and $4 billion in peak U.S. Rituxan sales by 2011. We raise our target price to $107 from $100.

Affordable Residential Communities (ARC ) : Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Robert McMillan

Third quarter loss of 53 cents vs. loss of 39 cents is wider than our 38 cents loss estimate, while per-share funds from operations at a negative $2.64 miss our positive 4 cents estimates on higher expenses despite a revenue rise. We think third quarter results support our view that the company's relatively low-income customers make it susceptible to economic shocks, limits the ability to hike prices and raises risk of default among its customers. We are cutting our 2005 and 2006 funds from operation estimates to negative $2.65 and negative 50 cents, from positive 16 cents and 42 cents. We are lowering our target price by $8 from $12.

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