S&P Downgrades Shares in Tiffany, Vodafone and Ethan Allen

Plus: analysts upgrade recommendations on Toll Brothers and McDATA shares, but cut Manulife Financial ratings

Tiffany (TIF ) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Jason Asaeda

October quarter operating earnings per share of 18 cents vs. 14 cents beats our 16 cents estimate. Tiffany maintained positive U.S. sales momentum and gross margins widened on a favorable mix shift and lower product costs. Sales of diamond jewelry priced from $3K to $20K and over $50K were particularly strong. Operations in Japan also showed signs of a turnaround. We view Tiffany as well positioned for holiday selling and are lifting our fiscal year 2006 (ending January) operating earnings per share estimate by 2 cents to $1.67. But with shares approaching our 12-month target price of $43, we would not add to positions.

Vodafone Group (VOD ) : Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Subhajit Gupta

We believe that Vodafone's franchise is deteriorating relative to its peers in Japan, Germany, and the U.K., three of its five key markets. In addition, we note that approximately 25% of Vodafone's value comes from assets it does not control in France and the U.S., and we are not convinced that the company has a competitive advantage of scale and scope. As a result, we have assumed Vodafone's earnings margins will contract over the next three years. Our 12-month target price is $21, cut today from $27.

McDATA (MCDTA ): Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Richard Stice, CFA

October quarter operating earnings per share of 2 cents vs. 4 cents is 2 cents above our recently lowered estimate, aided by a one-time tax benefit. Revenue rose 2% from the July quarter. Based chiefly on cost reduction benefits associated with the Computer Network Technology acquisition, we are raising our fiscal year 2006 (ending January) earnings per share estimate by 5 cents to 13 cents. Our 12-month target price rises 50 cents to $4. While we remain concerned about rising competitive threats at the high end of the storage switch market, we believe recent product launches should benefit McDATA's fiscal year 2007 results.

Manulife Financial (MFC ) : Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Frank Braden

With shares currently trading at 14.2 times our 2006 earnings per share estimate of $4.08, Manulife Financial is at a considerable premium to its peers. Although we have a long-term positive outlook on the company, we do not believe a large premium is warranted. We are encouraged by the company's strong U.S. variable annuity sales and solid U.S. wealth management results, but somewhat concerned about recent results in its guaranteed and structured financial products business. Our 12-month target price remains $54, 13.2 times our 2006 EPS estimate, including projected stock option expense.

Ethan Allen (ETH ) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Amy Glynn, CFA

Ethan Allen shares have risen 20% since Sept. 30. We continue to see the company as a leader in the struggling furniture industry, based on our view of its success in improving manufacturing efficiency and managing costs, and its new design collections. We think sales trends may be improving, but that "hot" consumer electronics, now heavily discounted at retail, will take the lion's share of holiday spending. We are raising our 12-month target price by $2 to $39, 16 times our fiscal yaer 2006 (ending June) estimate of $2.44, based on our belief that the improved cost environment could lead to modest earnings expansion.

Toll Brothers (TOL ) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: William Mack, CFA

On a relative basis, we believe demand for Toll Brothers homes, priced at more than twice the average, is highly sensitive to consumer confidence. Thus, solidly improved consumer sentiment in November, reported yesterday, gives us increasing confidence in our fiscal year 2006 (ending October) earnings per share estimate of $5.65. Following its recent sell-off, Toll Brothers now trades at a modest discount to the average builder's price-to-earnings of about 6.5 times next year's forecasts. But we think this discount will revert to the shares' historical premium; our 12-month target price, unchanged at $44, is based on about 7.8 times forward price-to-earnings.

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