S&P Downgrades Chattem, Cooper, Eaton Vance

Plus: Analysts upgrade Fred's, but cut ratings on Brown-Forman and Smith International

Chattem (CHTT ) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Howard Choe

Chattem's Chief Financial Officer, R. Moss, resigned to take a position with a Fortune 500 company. With what we see as its lighter management bench, we think Chattem's execution risk has risen. The current Chief Operating Officer, R. Bosworth, will take Mr. Moss's place in the interim. This resignation is the second major loss to the executive team in three months. While Bosworth was Chief Financial Officer from 1985-1998, he is only three months into taking over for the recently departed Chief Operating Officer. We are lowering our target price to $38 from $46. Given the company's high margins and leading market shares in niche categories, we rate the stock at Hold.

Cooper Companies (COO ) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Cameron Lavey

Cooper Companies lowered its revenue and earnings per share guidance for fiscal year 2005 (ending October), fiscal year 2006 and fiscal year 2007 due to weak spherical lens sales in the U.S., as well as unfavorable currency conversion rates. We think Cooper Companies is losing share to competitors due to its lack of a silicone hydrogel product and we do not expect these trends to reverse in the near term. We are lowering our fiscal year 2005 operating EPS estimate by 12 cents to $3.28, and fiscal year 2006's by 37 cents to $3.51, after 12 cents projected option expense. We are also lowering our 12-month target price by $18 to $57, about 16 times our fiscal year 2006 estimate; in line with peers.

Fred's (FRED ) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Jason Asaeda

October quarter earnings per share of 16 cents vs. 19 cents misses our 17 cents estimate on an accounting adjustment for Fred's early renewal of a major pharmaceutical supply contract, plus higher utility/fuel costs, and hurricane expenses. Weak store traffic concerns us, but improving inventory turns and pharmacy margins, and controlled store labor, corporate overhead and distribution costs, give us confidence in Fred's ability to strengthen sales and earnings ahead. We are increasing our fiscal year 2006 (ending January) earnings per share estimate by a penny to 71 cents and fiscal year 2007's by 3 cents to 85 cents. We are raising our target price by $6 to $17.

Eaton Vance (EV ) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Robert Hansen, CFA

Eaton Vance posted October quarter earnings per share of 31 cents vs. 27 cents, matching our estimate. We are impressed by consistent net client inflows, aided by strong demand for the company's closed-end funds, which have transitioned towards more equity offerings. However, growth in sales incentives, compensation costs, and stock option grants temper our enthusiasm for Eaton Vance shares. We are leaving our fiscal year 2006 (ending October) earnings per share estimate at $1.37 and keeping our 12-month target price at $29, 21 times our fiscal year 2006 earnings per share estimate. Trading at a price to earnings multiple comparable to peers, we now view the valuation on the shares as appropriate.

Brown-Forman (BF.B ) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Anishka Clarke

Aided by a lower tax rate, October quarter earnings per share of 91 cents vs. 76 cents beats our 87 cents estimate. Sales were below our forecast, limited by trade inventory cuts. But we are encouraged by high depletion rates. For the rest of fiscal year 2006 (ending April), we expect ongoing trade reductions to limit sales growth and partly offset margin benefits from improved cost structure from the Lenox sale, depletion strength, and anticipated distribution changes. We are trimming our fiscal year 2006 estimate to $2.83 from $2.84, but raising our target price to $68 from $67 on the wider margin long-term potential we see. At the current level, we would now hold.

Smith International (SII ) : Cuts to 4 STARS (buy) from 5 STARS (strong buy)

Analyst: Stewart Glickman

Following a surge of about 16% in Smith International shares in the past month, we believe they no longer offer the upside potential to warrant a strong buy. However, we think Smith International should continue to benefit from strong oilfield activity, and with our expectation of better pricing traction, we are raising our 2006 earnings per share estimate to $1.92 from $1.78. Smith International shares are trading at 9.1 times our 2006 earnings before interest taxes depreciation and amortization, or EBITDA estimate, below peers' 10.5 times, and at a discount as well on price/cash flow. Our 12-month target price rises $4 to $44.

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