S&P Cuts Mellon Financial, U.S. Steel, Applied Biosystems

Plus: analysts upgrade their recommendation on Chesapeake Energy shares to strong buy from buy

Mellon Financial (MEL ): Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Mark Hebeka, CFA

We believe Mellon Financial is still well diversified and has strong fundamentals, but after its recent price rise, we see the stock being fairly valued. We look for healthy growth in asset management and asset servicing for the next several quarters, and continue to view recent acquisitions and joint ventures favorably, as we see geographic and product diversity as a key to Mellon's long-term success. Our 2005 and 2006 operating earnings per share estimates remain $1.89 and $2.08, respectively. We are also maintaining our 12-month target price of $35, about 17 times our 2006 earnings per share estimate, in-line with peers.

Applied Biosystems (ABI ): Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Jeffrey Loo, CFA

Applied Biosystems shares have risen 20% over the past two months and now exceed our view of appropriate valuation. Although we are encouraged by the company's recently improved growth, we still see only mid-single-digit growth over the next 12 months. We are expecting mixed business performance, but we think Applied Biosystems's buyback program should limit the downside. Our 12-month target price remains $25.

Chesapeake Energy (CHK ): Ups to 5 STARS (strong buy) from 4 STARS (buy)

Analyst: Charles LaPorta

Our upgrade is based on valuation. We believe the stock's recent decline reflects declining natural gas prices and the implied dilution from the recent issue of equity-linked securities. However, we think Chesapeake Energy's shares provide value, despite the lower natural gas prices, because the company has hedged over 70% of its fourth quarter production and over 50% of its 2006 production at what we believe are attractive prices. We are lowering our 2006 earnings per share estimate by 15 cents to $2.60, on lower gas prices, but maintaining 2006's at $3.35. Our target price stays at $37, reflecting a price-to-earnings of 11 times our 2006 estimate.

U.S. Steel (X ): Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Leo Larkin

We project earnings per share of $6.65 in 2005 and $5.95 in 2006, as we believe that a higher shipment volume will be offset by a lower average realized price. We see U.S. Steel as a special situation turnaround. In our view, the company will benefit from ongoing steel industry consolidation, a gradual decline in its health care and pension costs, and a decrease in its debt leverage. But with a small upside to our $52 12-month target price, we wouldn't add to positions. At our target price-to-earnings, U.S. Steel would trade at the low end of its historical range.

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