S&P Upgrades Phelps Dodge to Buy

Plus: Analysts downgrade Biomet and Zimmer Holdings, and more

From Standard & Poor's Equity Research

Phelps Dodge (PD) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Leo Larkin

Phelps Dodge's stock is down after news that it plans to acquire Inco (N) in a friendly cash and stock transaction valued at C$80.13 per Inco share, or about $71 a share in U.S. dollars, subject to needed approvals. While there could be near-term downward pressure on Phelps Dodge due to the issuance of shares and debt in the planned deal, we think the proposed merger would be beneficial to Phelps Dodge in long term. In our view, nickel has stronger fundamentals than copper and Inco's capital spending should peak in 2006, which should boost future free cash flow. Our target price remains $92.

Inco (N) : Reiterates 3 STARS (hold)

Analyst: Leo Larkin

Inco's shares are up on news that it agrees to be acquired by Phelps Dodge in a cash and stock deal valued at C$80.13 or about US$71, pending approvals. Completion of the proposed transaction is not contingent on a successful related proposed takeover of Canadian-based metals producer Falconbridge (FAL) by Inco. In our view, the proposed transaction will combine Inco with a financially stronger Phelps Dodge, and its nickel business would complement Phelps Dodge's molybdenum. We are keeping our target price at $75 to allow for the possibility of a rival offer.

Ryland Group (RYL) : Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: William Mack, CFA

Our 2006 earnings per share (EPS) estimate remains $9.05. However, we are reducing our 2007 forecast to $8.15 from $9.25 based on further evidence that new home sales are trending downward. Since we see little visibility into even this lower forecast for next year, we have shifted to valuing Ryland Group exclusively on stockholder's equity, which we believe is comparatively more stable and predictable than earnings. Thus, we are lowering our 12-month target price to $40 from $60, which now represents a multiple of about 1.2 times our estimate of year-end 2006 per-share book value of $33.

Biomet (BMET) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Robert Gold

Biomet says the Department of Justice has issued a subpoena to the company as part of a criminal investigation regarding possible violations of antitrust laws, including those involving the manufacture and sale of orthopedic implant devices. We believe the subpoena is part of an expanding DoJ probe of sales practices across the orthopedic device industry. As a result, we are taking a more cautious stance on the orthopedic group. Our 12-month target price falls by $15 to $31, based on a forward price/sales in line with our device coverage universe. We would not add to positions.

Zimmer Holdings (ZMH) : Cuts to 1 STAR (strong sell) from 4 STARS (buy)

Analyst: Robert Gold

Zimmer Holdings says the Department of Justice has issued a subpoena to the company as part of a criminal investigation regarding possible violations of antitrust laws, including those involving the manufacture or sale of orthopedic implant devices. We believe the probe is part of an expanding look at sales practices across the entire orthopedic device industry, including relationships between manufacturers and physicians which may have been anticompetitive. We are lowering our 12-month target price by $26 to $51, based on a forward price/sales in line with our device coverage universe.

Johnson & Johnson (JNJ) : Reiterates 5 STARS (strong buy)

Analyst: Robert Gold

Johnson & Johnson agrees to acquire the consumer healthcare business of Pfizer (PFE) for $16.6 billion in cash, in a deal expected to close by the end of 2006, subject to approvals. The purchase would significantly broaden the company's reach in consumer products, adding about $4.0 billion of sales and brands, including Listerine, Nicorette, Lubriderm, Visine, Benadryl and Zantac. We believe Johnson & Johnson's offer is aggressive, however, valuing the franchise at more than 4.1 times sales, and we think the deal will likely dilute earnings per share (EPS) in 2007 and 2008. We will update after 9:00 call.