S&P Downgrades Apple Shares

Plus: Analysts comment on Chevron's find in the Gulf of Mexico, Phelps Dodge's cancelled merger plan, and more

From Standard & Poor's Equity Research

Apple Computer (AAPL) : Cuts to 4 STARS (buy) from 5 STARS (strong buy)

Analyst: Richard Stice, CFA

We are taking a less bullish stance on shares, given their nearly 40% appreciation since mid-July. We continue to believe the Mac line will gain market share, in part on competitor missteps and also a stronger retail presence. In addition, we expect that Apple will benefit from new iPod offerings, which we expect to hit the marketplace before year-end and have a favorable impact on the seasonal December quarter. However, we believe these potential catalysts are now being partially reflected in the current share price. Our 12-month target price remains $83.

Chevron Corp. (CVX) : Reiterates 5 STARS (strong buy)

Analyst: Tina Vital

Chevron has successfully completed a production test of its Gulf of Mexico Jack #2 well (Chevron has 50% stake), under a record 7,000 feet of water and more than 20,000 feet of sea floor. During the test, the well sustained an oil flow above 6,000 barrels of crude oil per day with the test representing approximately 40 percent of the total net pay measured in the Jack #2 well.

Sinopec Shanghai Petrochemical (SHI) : Maintains 4 STARS (buy)

Analyst: Lorraine Tan

We are reducing our earnings per ADS estimates for 2006 and 2007 to $0.90 and $2.55 from $1.80 and $3.20. The first half 2006 interim net profit of RMB 6M was down nearly 100%, but better than our estimate of net loss of RMB 13M mainly due to better cost controls and higher contribution from associate cos. We believe risks are rising for global economic growth to slow while expenses remain sticky. Given our reduced earnings forecasts, we are lowering our target price to $54 from $58. The main driver for the shares, in our view, remains the potential privatization by 56%-owner Sinopec.

Viacom Class B Shares (VIA.B) : Reiterates 3 STARS (hold)

Analyst: Tuna Amobi, CPA and CFA

Viacom names director/prior exec. Phillipe Dauman as Pres./CEO, replacing Tom Freston, who has resigned, and director Tom Dooley to new post of Chief Administrative Officer. We infer from Chrm Redstone's comments that the abrupt news reflects the company's lackluster share price after 1/3 split from CBS (CBS). We see uncertainties with 2006 guidance, digital strategy, and Paramount turnaround. Duaman sees entrepreneurial culture, with no major strategy shift, and says Dooley is "right-hand" man, as CFO Dolan's fate seems unclear. We lower our target price $2 to $38.

Phelps Dodge (PD) : Reiterates 3 STARS (hold)

Analyst: Leo Larkin

Shares of the world's 2nd largest copper producer are up following news that the company cancelled its plans to acquire Inco (N). Absent the merger, we believe Phelps Dodge will avoid what might have been substantial dilution and a more highly leveraged balance sheet. In our view, this news was no surprise given that there was shareholder opposition to Phelps Dodge's proposed merger and that Phelps Dodge was unlikely to match Compania Vale do Rio Doce's (RIO) all cash bid. With the shares trading about in line with our $92 target price, we would not add to positions.

Merrill Lynch (MER) : Reiterates 5 STARS (strong buy)

Analyst: Royal Shepard

Merrill Lynch agrees to acquire the First Franklin mortgage origination franchise and related servicing platform from National City Corp. (NCC) for approximately $1.3 billion, pending approvals. In a separate transaction, Merrill Lynch also expects to buy from National City Corp. about $5.6 billion of First Franklin-originated mortgage loans. The purchase, in our view, is another step in building Merrill Lynch's global mortgage platform, which includes origination and servicing businesses in the U.S., Asia, and Europe. We are encouraged by Merrill Lynch's ongoing diversification and maintain our strong buy recommendation.

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