S&P Picks and Pans: AT&T, Apple, BCE, Manor Care, Lexmark, Dominion Resources

Analysts' opinions on stocks in the news

AT&T (T; recent price: $41.50): Maintain 3 STARS (hold)

Analyst: Todd Rosenbluth

Based on an unconfirmed Bloomberg report and our trips to AT&T wireless stores, we believe that, due to strong demand, many of the outlets were sold out of the iPhone this weekend. We look for AT&T to see the benefit of iPhone sales in its third quarter, though we think the high price tag, the challenges activating the phone and the technical difficulties we faced using the Internet while testing the phone will cause some potential buyers to purchase other handsets. We believe the launch has overshadowed AT&T's pending merger with Dobson Communications (DCEL; $11.11; 3 STARS, hold) for $13 a share in cash.

Apple (AAPL; $122.04): Reiterates 4 STARS (buy)

Analyst: Scott Kessler

Unconfirmed published reports from outlets, including Bloomberg and the L.A. Times, indicate some 200,000-525,000 iPhones were purchased from Friday at 6 pm through Sunday. Many outlets sold out of the devices. But we wonder about the sustainability of this strong demand in light of the likely reduced level of favorable publicity, the relatively high price points, and issues that we encountered. We think the virtual keypad is cumbersome and the non-Wi Fi connection speeds are slow. However, we believe the iPhone is an appealing product that will improve over time.

BCE (BCE; $37.79): Maintain 3 STARS (hold)

Analyst: Todd Rosenbluth

BCE agreed to be acquired by a Canadian-led private equity consortium for $40.13 per U.S. share, pending necessary approvals. Separately, we are raising our EPS estimates by $0.03 to $2.04 in 2007 and by $0.04 to $2.10 in 2008, reflecting the net impact of a stronger Canadian dollar offset by weaker EBITDA. Based on our new estimates, deal terms look favorable to BCE at a p-e of 19 and an enterprise value/EBITDA multiple of 7, above peers and a 40% premium to early-April trading, before its strategic review. We raise our 12-month target price by $4 to $40 to reflect deal terms.

Manor Care (HCR; $64.25): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Jeffery Englander

HCR says that after a review of strategic alternatives, it has agreed to be taken private for $67 a share in cash by The Carlyle Group. The price is about a 3% premium to Friday's closing price, and a 20% premium to the share price prior to HCR's announcement it was seeking strategic alternatives. While we view the buyout price of about 11 times enterprise value-to-estimated 2008 EBITDA as mildly disappointing, we see other bids as unlikely given HCR has been exploring alternatives since April, and conditions in the mortgage bond market are volatile. We cut our target price to $67 from $76.

Lexmark International (LXK; $49.72): Upgrades to 3 STARS (hold) from 2 STARS (sell) based on valuation

Analyst: Clyde Montevirgen

The shares have fallen over 15% over the past few months and are now below our 12-month target price of $54. We think LXK will continue to face stiff competition from Hewlett-Packard (HPQ; $45.10) and that strong sales of lower-end systems may continue to pressure margins and profitability. However, we think LXK's potential as an acquisition candidate will support the shares in the near term. We are maintaining our 12-month target price of $54, based primarily on our p-e analysis.

Dominion Resources (D; $86.31): Maintains 4 STARS (buy)

Analyst: Christopher Muir

Dominion Resources agrees to sell its mid-continent exploration and production assets for $2.05 billion, bringing the total of its E&P divestitures to nearly $14 billion. Recently the company also announced a $5 billion dollar tender offer for its shares, and plans to reduce debt by $3.5 billion. Dominion said it intends to purchase additional shares on the open market, outside of the tender offer, and we believe this transaction will provide a substantial amount of cash for use. We like Dominion's efforts to refocus on its core businesses. Our 12-month target price remains $101.

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