S&P Picks and Pans: Biomet, Norfolk Southern, Meritage, Martek

Analyst opinions on stocks making headlines Thursday

Biomet (BMET; $45.61)

Keeps 3 STARS (hold)

Analyst: Robert Gold

Biomet has agreed to an enhanced acquisition offer from a private equity consortium valuing the company at $11.4 billion, or $46 per share, up from $10.9 billion, or $44 per share. As a result, Biomet has cancelled a shareholder vote slated for tomorrow and has also agreed to suspend its cash dividend. We believe the consortium's increased bid is more in line with valuations in the orthopedic device space, and think the merger will be consummated at the revised price. As a result, we are boosting our 12-month target price by $2 to $46, on par with the terms of the deal.

Norfolk Southern (NSC; $56.53)

Maintains 3 STARS (hold)

Analyst: Kevin Kirkeby, CFA

After the company's investor meeting yesterday, we believe it continues to achieve rate increases that help offset near-term volume weakness. Carloadings are down 4.5% in the quarter through June 2. Norfolk Southern sees itself still in a catch-up phase regarding network investments, and we expect the pace of share buybacks will lag market expectations as the majority of cash flow is directed to infrastructure projects. Based on our price-to-earnings and and discounted cash-flow models, we believe Norfolk Southern shares are fairly valued, and we are maintaining our $57 12-month target price.

Meritage Homes (MTH; $32)

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

Analyst: Thomas Smith, CFA

Meritage warns it is apt to miss its guided targets for 2007 earnings because of slower demand and rising order cancellations experienced in April and May. This is a reversal of positive monthly trends in the firts quarter, and we believe Meritage is now encountering more pressure from credit tightening. We are lowering our EPS estimates to $1.50 from $2.55 for 2007, and to $1.80 from $3.50 for 2008. Applying a target price-to-book valuation of 0.9 times, near the low end of the historical range, to our forward book value projection, near $41, we are reducing our 12-month target price to $37 from $46.

Martek Biosciences (MATK; $21.99)

Reiterates 4 STARS (buy)

Analyst: Jeffrey Loo, CFA

April-quarter EPS of l5 cents, vs. 17 cents one year earlier, matches our estimate. Infant formula sales rose 6.5%, aided by international growth, while food, pregnancy and nursing product sales almost doubled on a much smaller base. Eight new food-related products were launched in April-quarter and we see more in second half of fiscal 2007 (ending October). Martek says it is in talks with over 150 companies on potential food products. We also expect continued gross margin improvement on lower arachidonic acid costs, benefits from restructuring and leverage, and from lower contract manufacturing. Our 12-month target price remains $29.

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