S&P Keeps Strong Buy on PETsMART

Plus: Opinions on Gilead Sciences, Wal-Mart, Vertex, First Data, and Pacific Sunwear

From Standard & Poor's Equity Research

PETsMART (PETM): Reiterates 5 STARS (strong buy)

Analyst: M. Souers

PETsMART said at its annual shareholder meeting that it now plans to build 435 PetsHotels, up from its original estimate of 300. Data has suggested that stores with hotel service have higher sales and levels of profitability than those without, and we are raising our operating margin projections in the later years of our discounted cash-flow model. While we are keeping our fiscal 2007 (Jan.) and fiscal 2008 operating EPS estimates of $1.34 and $1.58, we are raising our 12-month target price by $2 to $34. We believe PETsMART's valuationremains compelling, with shares trading at a p-e-to-growth rate of about 1.0X.

Harrah's Entertainment (HET): Reiterates 3 STARS (hold)

Analyst: Tom Graves, CFA

The stock is up sharply this morning after news of an $81 per share buyout proposal from private equity firms. Although this is modestly below the high price that the stock reached earlier this year, we do not expect a higher bid to emerge. Subject to approvals, we look for the deal to occur in 2007. We are surprised that Harrah's is a buyout target, given the large capex we expect ahead for the company. However, we assume Harrah's sizeable operating cash flows helped to attract buyout interest. We are raising our 12-month target price to $81 from $70, to reflect the buyout proposal.

Gilead Sciences (GILD): Downgrading to 3 STARS (hold) from 4 STARS (buy)

Analyst: Paul Starsia

Gilead Sciences agrees to acquire Myogen (MYOG) for $2.5 billion, or $52.50 per share. Myogen's lead drug is ambrisentan oral medication for pulmonary arterial hypertension, in Phase III trials. It also markets Flolan, an intravenous treatment for pulmonary arterial hypertension, and has Darusentan, for resistant hypertension, in the clinic. The acquisition, if approved and consummated, is expected to be dilutive in 2007 and 2008, but bolsters Gilead's expansion into the pulmonary space. We are reducing our 2007 EPS estimate to $2.55 from $2.70 and our 12-month price target by $8 to $70.

Wal-Mart Stores (WMT): Reiterates 5 STARS (strong buy)Analyst: Joseph Agnese

Wal-Mart estimates that September comparable-store sales rose 1.8%, below our projection of 2.2% but near the midpoint of the company's prior 1%-3% guidance range. We believe comp-store sales will continue to be driven by higher tickets as consumers cut back on fill-in trips during the week in favor of stock-up weekend visits. We expect comp-store sales to improve throughout the rest of fiscal year 2007 (January) as Wal-Mart achieves significant remodeling progress by the end of the October quarter. We are keeping our fiscal year 2007 EPS estimate of $2.92, and our 12-month target price of $56 based on discounted cash flow and p-e analysis.

Vertex Pharmaceuticals (VRTX): Upgrades to 5 STARS (strong buy) from 4 STARS (buy)

Analyst: Paul Starsia

We expect positive data from the PROVE-1 Phase II trial of VX-950 before the end of 2006 and a steady stream of clinical results throughout 2007. Based on previous study results, we believe that VX-950 has the highest degree of anti-viral activity among current Hepatitis C treatments, has exhibited no major adverse events, and has multi-billion sales potential. We believe the recent decline in Vertex's share price has created an attractive buying opportunity. We are also raising our 12-month price target to $42 from $39, based on assumption changes to net present value.

First Data (FDC): Reiterates 2 STARS (sell)

Analyst: Scott Kessler

First Data completes its spin-off of Western Union (WU) 19.91). We are normalizing our EPS estimates to reflect First Data without Western Union. We are thus lowering our EPS estimates for 2006 to $1.27 from $2.30, and 2007 to $1.40 from $2.64. Based on our revised forecasts and relative analyses, we are reducing our 12-month target price to $20 from $39. We think the Western Union spin-off is paramount to First Data selling its best business, and will also contribute to lower earnings quality at least over the near term. In our view, First Data competes in highly commoditized segments and has muted growth prospects.

Pacific Sunwear of California (PSUN): Reiterates 3 STARS (hold)

Analyst: Marie Driscoll, CFA

Today's announcement that Seth Johnson resigned as CEO to pursue other interests resulted in a rally in Pacific Sunwear shares. However, we see continued weakness in Pacific Sunwear's operational execution at PacSun and d.e.m.o. chains because of weak competitive positioning. Johnson's expertise was financial and operational, not merchandise-based, and we anticipate the company's board to seek greater merchandise acumen in a new CEO. Monthly same-store sales comparisons have been negative since February, and we see this trend continuing for the remainder of fiscal year 2007 (January), with easing comparisons in fiscal year 2008.

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