business

S&P Picks and Pans: Home Depot, Tiffany, Leap, Watson Pharma

Analyst opinions on stocks making headlines Tuesday

S&P REITERATES STRONG BUY RECOMMENDATION ON SHARES OF HOME DEPOT

HD; $36.60

Based on the preliminary count by the depository for the Dutch Auction self-tender offer, Home Depot expects to purchase approximately 289.6 million shares at a price of $37 per share. Total cost would be $10.7 billion, excluding fees and expenses related to the tender. In spite of the current uneasiness in the credit market, we anticipate Home Depot will issue about $12 billion in debt sometime in 2008 in order to repurchase shares and complete its $22.5 billion recapitalization plan. We continue to favor Home Depot's risk/reward profile, and are keeping our discounted cash-flow-based 12-month target price at $48. /M. Souers, K. Leon

S&P UPGRADES SHARES OF TIFFANY & CO. TO STRONG BUY FROM BUY, ON VALUATION

TIF; $51.68

We like Tiffany's positioning as a global prestige brand, and project mid-teens earnings growth on solid U.S. sales, continued international growth, notably in Asia beyond Japan, and on good operating leverage. We see higher-profitability other-Asia growth accelerating profits. Besides increased store openings, we believe sales will benefit from recent moves into eyewear and expanded distribution of wholesale watches. On top of second dividend hike this year, we think $636 million remaining in share buyback program provides further support. We are keeping our 12-month target price of $63. /E.Kwon-CFA

S&P MAINTAINS HOLD OPINION ON SHARES OF LEAP WIRELESS

LEAP; $82.83

Following a MetroPCS (PCS; $28.65) call to discuss its unsolicited offer to acquire Leap in a stock-based deal that was worth $75 before today's market opened, we are raising our 12-month target price on Leap by $21 to $84. We believe the deal, if consummated, will not alter the dependence Leap has on low-income consumers and new market launches. However, we believe a higher offer is likely and value Leap at a 25% takeout premium to our prior analysis. We believe Leap deserves a higher enterprise value/EBITDA multiple than peers, based on stronger growth prospects we see. /T.Rosenbluth

S&P REITERATES HOLD OPINION ON SHARES OF WATSON PHARMACEUTICALS

WPI; $30.30

FDA clears Watson to begin manufacturing at its Goa, India, plant. With additional product approvals, the low-cost facility is expected to be producing over 1 billion pills annually by early 2008, mostly for the U.S. market. Helped by the new plant, we see 2008 gross margins rising to 41%, from 39.5% expected in 2007. Near-term results should also benefit from new generic launches. However, we think Watson still faces challenges integrating Nov 2006 acquisition Andrx, including resolving Andrx's manufacturing issues. Our 12-month $33 target price is a peer-level 17.4 times the $1.90 EPS we see in 2008. /H. Saftlas

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