S&P Cuts L3 Communications to Hold

Plus: Analyst opinions on Realogy, Directed Electronics, and more

L3 Communications (LLL)

Cuts to 3 STARS (hold) from 5 STARS (strong buy)

Analyst: Richard Tortoriello

L3 Communications lost the re-bid of the U.S. Army's Linguist contract to supply translators in Iraq and elsewhere, which L3 Communications valued at $600 million in 2007. We are surprised by the Army's choice of a competitor over incumbent L3 Communications and note the contract was L3 Communications's largest. We are lowering our 2007 earnings per share (EPS) estimate to $5.55 from $5.70, and reducing our 12-month target price to $88 from $100. We note that L3 Communications continues to expect free cash flow of $1 billion in 2007, up 18% from 2006' $850 million estimate. However, we see loss of this contract as a headwind for L3 Communications in achieving growth targets over the next two years.

SanDisk (SNDK)

Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Jay Hingorani

SanDisk announces a share repurchase program of $300 million which, based on current prices, could result in a share-count reduction of 3.5%. We believe shares of SanDisk are attractively priced at current levels and we recommend purchase. We are raising our 2007 EPS estimate to $2.39 from $2.31. Our target price remains $53, 22 times our 2007 EPS estimate. We see increased opportunities for SanDisk in portable media players, as well as the computing market. We think near-term pricing and margin concerns are mitigated by overall demand for flash memory and by SanDisk's leadership position.

Build-a-Bear Workshop (BBW)

Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Michael Souers

Build-a-Bear Workshop shares have fallen about 15% within the past month and we now view them as attractive. We expect near-term strength in sales this holiday season, in part due to projections that the limited edition sale of Happy Feet's 'Mumble' was a large success. In addition, longer-term demographic trends remain positive, in our view, such as an increase in birth rates and increased spending by children. Our 12-month target price remains $31, and we would buy Build-a-Bear Workshop.

Eli Lilly (LLY)

Reiterates 3 STARS (hold)

Analyst: Herman Saftlas

Lilly sweetens its bid for ICOS to $2.3 billion from $2.1 billion, apparently due to ICOS holder dissatisfaction with the original offer. We expect the new bid, which Lilly says is its final offer, to be accepted. Although the acquisition is expected to be dilutive to Lilly's earnings in 2007, we think ICOS should be accretive in 2008. We think recent press concerning Zyprexa obesity and diabetes risks, and alleged promotion for unapproved uses are fairly widely known. We are not altering our 2007 projections for that drug. Our target price stays $62, a modest premium-to-peer p-e of 18.8 times applied to our $3.30 2007 EPS estimate, plus 3.0% yield.

Realogy (H)

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

Analyst: Thomas Graves, CFA

Realogy agrees to be acquired by an affiliate of Apollo Management, L.P. Realogy shareholders will receive $30 per share vs. Friday's $25.50 closing price. We look for the transaction, subject to necessary approvals, to close in the spring of 2007. Realogy may solicit alternative third party bids until February 14. If Realogy accepts a superior proposal from another party, we expect that a break-up fee would be payable to Apollo. But we do not expect a higher offer to emerge, and the stock is now trading modestly above our revised target price of $30 (raised from $27).

Directed Electronics (DEIX)

Initiates coverage with 4 STARS (buy)

Analyst: J. Peters, CFA

We like the strategy by this marketer of vehicle security and convenience products of building a portfolio of well-known brands. By selling its products under multiple brand names at various price points and through different retail outlets, Directed, in our view, is able to gain market share and avoid brand dilution. Consistent with this strategy, we expect it to add additional brands through acquisition. We see $1.08 2006 EPS, $1.27 in 2007. Our target price of $15 is derived from our discounted cash-flow analysis and assumes a 9.4% weighted average cost of capital and 3% terminal growth.

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