S&P Cuts Borders to Sell

Plus: Analyst opinions on Western Digital, Boston Beer, and more

Borders Group (BGP)

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

Analyst: M. Souers

Following the company's disappointing holiday sales results, we are lowering our fiscal 2007 (ended January) EPS estimate to 29 cents from 66 cents. In addition, despite the expected increase in sales generated by July 21's expected release of the final Harry Potter book, we think margin pressure will mount due to a highly promotional environment. As a result, we are also lowering our fiscal 2008 EPS estimate to 75 cents from $1.25. We are cutting our discounted cash-flow-based target price to $20 from $25. With the stock trading at 29 times our fiscal 2008 EPS estimate, a significant premium to key peer Barnes & Noble (BKS), we would sell.

Western Digital (WDC)

Reiterates 5 STARS (strong buy)

Analyst: J. Hingorani

Two of the company's disk drives earn the highest score possible in testing with Microsoft's (MSFT) Windows Vista operating system, with minimum system requirements of 15 gigabytes of storage. We think that all of Western's drives being certified to run Vista position it well to benefit from the resulting PC and storage upgrade cycle. We also think the company's high-capacity SATA drives will fill the increased demands for storage and performance from Vista, both from OEMs and consumers in the aftermarket. Our target price of $27 is 13 times our 2007 EPS estimate of $2.10, below peers.

Boston Beer (SAM)

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

Analyst: R. Mathis

When the company announces fourth quarter results, we expect it to post top-line growth of nearly 23% and EPS of 20 cents vs. 16 cents. Although rising grain and packaging costs are a concern for all domestic brewers, we believe the company has been gaining market share at a rate that should allow it to more than offset these cost pressures. Retail data indicates that dollar sales of Samuel Adams have accelerated from 22.5% growth for full-year 2006 to 24.7% in the fourth quarter, and to over 31% so far in 2007. With shares having pulled back from a 52-week high of $37.50, we view the stock as attractively valued vs. our target price of $38.

Payless Shoesource (PSS)

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

Analyst: Mark Basham

We expect Payless Shoesource to report Jan. quarter EPS of $0.06 vs. a loss of $0.02 when it announces results on March 6. We project a revenue rise of 3.8%. Recently, Payless Shoesource announced it would close its Topeka, Kansas distribution center as it transitions to a dual DC strategy, with centers located in Redlands, Cal. and one east of the Mississippi River at a yet-to-be-announced site. We are lowering our fiscal year 2008 (ending Jan.) EPS estimate by $0.15 to $1.65 to account for total cash and non-cash expenses related to closing the Topeka center. We are maintaining our target price of $36.

Quilmes Industrial (LQU)

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

Analyst: Raymond Mathis

ADSs of Quilmes Industrial have appreciated beyond our $67 target price, which is derived of our DCF and P/E analyses and, most importantly, is close to the $67.07 acquisition price per ADS being offered by AmBev, a unit of InBev. Quilmes Industrial directors have already unanimously approved AmBev's offer to purchase the remaining 10% of Quilmes Industrial stock it does not already own. We believe this further share price appreciation could be due to speculation that a higher bid may be forthcoming. However, with AmBev's 90% ownership already in place, we believe a competing bid would be unlikely.

Semtech (SMTC)

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

Analyst: Clyde Montevirgen

Although we believe that execution risks remain as a result of recent management changes and Semtech's shifts to higher-margin products, we are upgrading our recommendation based on our view that the semiconductor industry should benefit from receding excess inventory levels. Also, we think the company's new products will provide growth opportunities in markets that we believe will grow faster than the broader semiconductor sub-industry. We are raising our 12-month target price by $6 to $17, based on higher P/E and price-to-sales multiples.

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