S&P Cuts Lexmark to Sell

Plus: Disney gets upgraded to strong buy and Hewitt Associates is lowered to sell, and more

Lexmark International (LXK)

Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Richard Stice, CFA

At yesterday's analyst meeting, the company provided details into its restructuring efforts, new product offerings and business model. We are concerned with the company's targeted 2007 operating margin of 8% to 10%, which is below our forecast. Moreover, we believe a more aggressive pricing environment is possible next year, as Lexmark increases its focus on the small and mid-size market. We are reducing our 2007 EPS estimate by 74 cents to $3.46 and our 12-month target price by $3 to $60. Given expected challenges that we anticipate, our recommendation is sell.

Walt Disney Co. (DIS)

Ups to 5 STARS (strong buy) from 4 STARS (buy)Analyst: Tuna Amobi

September quarter earnings per share (EPS) of 36 cents on 4% more shares, vs. 20 cents, is in line with our estimate and 3 cents above the Street's. We view results as stellar. With 2006 holidays likely to sustain early fiscal year 2007 (September) momentum, we see underlying trends robust at film studio (theatrical/DVD), solid at theme parks (traffic/occupancies), and strong at core media nets (ads/affiliate fees). Disney sees $700 million fiscal year 2007 digital revenues (online/mobile), implying 40% growth, as it prepares for greater push into video games development. We are raising our target price by $3 to $38, on sum-of-the-parts, but modest dividend yield.

Hewitt Associates (HEW)

Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Dylan Cathers

September quarter EPS of 21 cents, vs. 37 cents, is 4 cents below our estimate. We think Hewitt Associates will face challenges in human resources business process outsourcing segment, including underperforming contracts and possible client losses. Rising compensation in consulting business and increased investment spending could pressure margins in fiscal year 2007 (September), in our view. We expect Hewitt to take a charge in the December quarter for severance costs, and think more charges could arise. We are reducing our fiscal year 2007 EPS estimate by 17 cents to $1.07. We are lowering our target price by $2 to $23, or peer-discount 20 times our calendar 2007 estimate of $1.16.

Under Armour (UARM): Starts coverage with 3 STARS (hold) recommendation

Analyst: Marie Driscoll, CFA

Under Armour is a leading developer of branded performance apparel. Its widely recognized brand is known for performance and authenticity and is differentiated versus natural fiber products. We project 5-year sales and earnings growth rates of 25% and 30%, respectively, as Under Armour penetrates the $12.8 billion active sports apparel market and extends its reach internationally. But the promising fundamentals we foresee are already in the share price, in our view, at 45 times our 2007 EPS estimate of $1.00 and 3 times the level of the S&P 500, and we would not add to positions. Our 12-month target price is $47.

Applied Micro Circuits (AMCC)

Reiterates 3 STARS (hold)

Analyst: Jay Hingorani

Applied Micro Circuits reports September quarter revenues in a release limited because of ongoing options probe. September quarter revenues of $76.4 million are $4.4 million above our forecast, driven by 13% sequential growth in transport products, including revenues from the Quake acquisition. We are raising our fiscal year 2007 (ending March) operating EPS estimate by 1 cent to 8 cents, after options, reflecting accretion from the Quake acquisition, offset by slowing telecom spending and mergers. We are keeping our 12-month target price of $3.50 which, at 3.2 times our calendar 2007 sales per share estimate of $1.10, within historical averages.

Boeing (BA): Reiterates 4 STARS (buy)

Analyst: Richard Tortoriello

The Air Force announces that Boeing has been selected as the prime contractor for the Combat Search and Rescue Helicopter, the CSAR-X. Plans are to build as many as 141 over a 10-year program worth $10 to $12 billion. Boeing submitted an aircraft similar to the Special Ops version of its Chinook helicopter, and beat Lockheed Martin and United Technology's Sikorsky subsidiary for the contract award. We view the loss as particularly significant for incumbent Sikorsky, which also recently lost the Presidential helicopter program to Lockheed Martin.