S&P Lifts Constellation Brands to Buy

Plus: Analyst opinions on Gap Inc., Tractor Supply, and more

Constellation Brands (STZ)

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

Analyst: Raymond Mathis

Shares of Constellation have fallen more than 14% since the company on Jan. 4 cut its fiscal 2007 (ending February) comparable EPS guidance to $1.65-$1.70, from former guidance of $1.72-$1.76. We are lowering our operating EPS estimate by 6 cents, to $1.68. Including restructuring and integration charges, which we view as regular expenses for the historically acquisitive Constellation, our estimate for reported EPS goes to $1.32 from $1.38. Also, we are cutting our 12-month price target by $3, to $28. Nonetheless, we see the sell-off over the past two days as an overreaction, and now view Constellation as attractively valued.

Gap Inc. (GPS)

Reiterates 2 STARS (sell)

Analyst: Marie Driscoll, CFA

We are reducing our fiscal 2007 (ending January) and fiscal 2008 EPS estimates to 85 cents and 94 cents, from $1.04 and $1.25, respectively, based on our anticipation of continued traffic and merchandise troubles at Gap and Old Navy segments. Despite its attempts, particularly on the marketing front, we do not think the company has been able to turn these brands around, and in the meantime, the competition has vastly improved and consumer sentiment for unique, individual and differentiated product has accelerated the transition of Gap and Old Navy merchandise from fashion to commodities. Our 12-month target price remains $15.

Tractor Supply (TSCO)

Maintains 4 STARS (buy)

Analysts: M. Souers, J. Peters, CFA

Fourth-quarter same-store sales growth of 0.5% falls shy of our 2.0% estimate. Unseasonably warm weather in the northern regions of the country led to decreased demand for winter-related merchandise. However, core categories such as livestock and pet supplies performed to expectations, and we continue to have a favorable view on the company's strong niche and long-term growth potential in the farm and ranch retail industry. We are lowering our 2006 and 2007 EPS estimates to $2.22 and $2.67, from $2.25 and $2.68, respectively, but our 12-month discounted cash-flow-based target price stays at $54.

Universal Corp. (UVV)

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

Analyst: Raymond Mathis

Tobacco industry stocks have rallied as litigation issues continue to subside, in our view. Earlier this week, Universal announced a significant reduction in a punitive damages award against the company, from $25 million to $1.25 million. We believe Universal will also continue to benefit from its restructuring plan, as well as reduced volatility in international tobacco leaf markets. We are raising our 12-month target price to $51 from $45. However, after rising sharply in the fourth quarter, we view the stock as nearing our estimate of its fair value.

Kronos Inc (KRON)

Starts at 3 STARS (hold)

Analyst: Jim Yin

We believe Kronos is in transition as it broadens its workforce management offerings. While we are positive on the Unicru acquisition and the growth opportunity in Talent Management, we believe the company's organic growth rate will slow given the maturity of the time-and-labor systems market and a difficult sales environment. Our estimate for fiscal year 2007 (ending Sep.) operating EPS is $1.52, after $0.36 of stock option expense. Our 12-month target price is $38.

Sirius Satellite Radio (SIRI)

Maintains 3 STARS (hold)

Analyst: Tuna Amobi, CPA and CFA

While we think 2006 year-end 6.024 million subscribers released this week compares favorably to XM Satellite Radio's (XMSR) pre-announcement today, we note that implied fourth quarter net adds of 905,000 fell short of our reduced estimate of 1.2 million. While Sirius said it turned free-cash positive in the fourth quarter, our near-term view on the satellite radio sector is tempered by potential systemic slowdown we see in the retail channel, even as 2007 likely sets up as a major staging year for the ramp of auto OEM factory-installed units. Our target price on these high-risk shares remains $4.50.

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