S&P Cuts VeriSign to Strong Sell

Analyst Scott Kessler cited the company's third quarter. Plus: opinions on United Health Services, VF Corp, and more

VeriSign (VRSN) : Cuts to 1 STAR (strong sell) from 3 STARS (hold)

Analyst: Scott Kessler

VeriSign indicates preliminary non-GAAP third quarter earnings per share (EPS) of $0.24 vs. $0.27, in line with our estimate, which reflects $0.05 in projected option expense. VeriSign provides only preliminary EPS because of ongoing options backdating issues. After its sizable acquisition efforts since mid-2004, we think the company is somewhat unfocused and inefficient. We also see notable risks associated with backdating that are not reflected in the share price. Until these matters are resolved, we do not expect material buyback activity. We are cutting our target price to $18 from $21 on revised peer analysis.

3M (MMM): Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Anthony Fiore-CFA

Third quarter EPS of $1.17 vs. $1.08, before one-time items, is above our $1.15 estimate. Sales rose 8.8%, with organic volume growth, acquisitions, and currency contributing 6.5%, 1.7%, and 1.5%, respectively, but pricing reducing growth by 0.9%. We view strong rebound in profitability in the Display & Graphics business as encouraging evidence that 3M is making progress on improving its manufacturing process. We are raising our 2006 and 2007 EPS estimates by $0.05 each, to $4.50 and $5.05, respectively. Our 12-month target price rises to $84 from $80.

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

Analyst: Leo Larkin

Our downgrade is based on valuation. We continue to estimate EPS of $11.10 for 2006 but have increased our 2007 EPS estimate to $10.00 from $8.25 on a more optimistic outlook for the copper price. We believe that the copper price in 2007 will decline by less than we originally expected given continued tight metal exchange inventories and flat mine production. Consequently, less robust demand may not have as much of a negative impact as we expected. On our higher EPS estimate for 2007, we are raising our 12-month target price to $110 from $92.

Google (GOOG): Reiterates 4 STARS (buy)

Analyst: Scott Kessler

Google posts third-quarter earnings per share of $2.36, vs. $1.32 a year ago, well above our estimate of $1.99. Revenues rose 70%, in line with our forecast, paced by Google's websites. Gross margin benefited from a related more favorable revenue mix, and was the highest since the second quarter of 2003. Based on our view of a more positive margin outlook, we are raising our EPS estimates for 2006 to $8.83 from $8.26, and 2007 to $10.62 from $10.20. Following revised discounted cash flow (DCF) and peer considerations, we are raising our 12-month target price to $500 from $435. We think Google has strong momentum as the important holiday shopping season approaches.

Universal Health Services (UHS): Downgrades to 1 STAR (strong sell) from 3 STARS (hold)

Analyst: Cameron Lavey

We think industry trends in uncompensated care are deteriorating. Bad debt expense has already been at historic highs and we do not see any near-term improvements. UHS shares are trading at a premium to peers on a p-e basis, and we do not think such a premium is warranted. With its concentration of facilities in Texas, we think UHS has more exposure to the uninsured population than peers. We are lowering our 2006 EPS estimate by 10 cents to $2.70 and 2007's by 5 cents to $2.95. Our 12-month target price falls by $13 to $47, 16 times our 2007 estimate and slightly above peers.

VF Corp. (VFC): Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: Marie Driscoll, CFA

We see VF Corp.'s denim, outdoor and intimates continuing to build momentum in 2007 and 2008, producing above-industry-average sales and earnings growth. The company beat our third-quarter EPS estimate of $1.67, posting $1.75 vs. $1.61, on a 12% sales rise compared with our 6% forecast, and a tax rate decline of 180 basis points that offset a 100 basis points increase in selling, general, and administrative (SG&A) costs to support brands and grow retail presence. Operating margins declined 80 basis points to 15.2%. We are boosting our 2006 and 2007 EPS estimates to $5.10 and $5.70, from $5.00 and $5.50, and our target price by $18 to $88, using peer based 15.4 times our 2007 estimate.

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