S&P Stock Picks and Pans

S&P Keeps Strong Buy on Apple

Plus: Analyst comments on Creative Technology, AMD, Lockheed Martin, and more

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From Standard & Poor's Equity Research
Apple Computer (AAPL) : Reiterates 5 STARS (strong buy)
Analyst: Richard Stice, CFA

According to Reuters, Apple is set to recall 1.8 million notebook computer batteries following a small number of instances where they overheated. As was the case with Dell's (DELL) recall announcement last week, the battery packs were produced by Sony (SNE). As such, we anticipate Sony being ultimately responsible for the majority of the recall costs. While this news is disappointing, we believe Apple has a number of positive catalysts that should benefit the shares over the next 12 months.

Earlier on Aug. 24, Apple settled ongoing litigation with Creative Technology and will pay Creative $100 million. In addition, Creative Technology will begin to offer iPod accessory products later this year. We view Apple's decision as prudent, since it eliminates uncertainty and administrative costs associated with the issue. In addition, the settlement amount is only 1% of Apple Computer's net cash and short-term investments balance. Our 12-month target price rises by $8 to $83.

Creative Technology (CREAF) : Reiterates 2 STARS (sell)
Analyst: Richard Stice, CFA

Shares are notably higher this morning as Creative Technology settles litigation with Apple Computer (AAPL) and will receive a $100 million payment. In addition, Creative Technology will begin shipping iPod accessory products later this year. We are encouraged by the news and believe settlements with other vendors may be forthcoming. Based on lower risk factors that we see, our 12-month target price rises by $1 to $6. However, we remain concerned about the competitive landscape of the MP3 market and believe upcoming products by other players are likely to intensify this impact.

Advanced Micro Devices (AMD) : Reiterates 3 STARS (hold)
Analyst: Thomas Smith, CFA

We see the outlook for AMD improving a bit, following a spate of news that indicates rising customer demand for its processors. On August 1, IBM (IBM) announced an expanded line of servers using AMD's Opteron processors, and on August 17, Dell (DELL) announced it would build desktop computers with the company's processors. Also, AMD opened a new Research & Development center in Shanghai on August 22, which should improve proximity to customers. We are raising our 12-month target price to $28 from $20.

Patterson Companies (PDCO) : Cuts to 1 STAR (strong sell) from 4 STARS (buy)
Analyst: Richard Tortoriello

Second quarter EPS of 30 cents vs. 31 cents is shy of our 32 cents estimate. Sales rose 10%, and operating margin declined by 120 basis points. We believe Patterson Companies has temporarily lost the ability to show strong bottom-line growth, a result of factors such as weak margins in its veterinary business, slow growth in its medical business, and slowing sales. We are lowering our 2006 EPS estimate by 8 cents to $1.50, and 2007's by 19 cents to $1.60. Our 12-month target price falls by $15, to $27, 17 times our 2007 estimate, at the low end of Patterson Companies's historical range.

TiVo (TIVO) : Reiterates 5 STARS (strong buy)
Analyst: Tuna Amobi, CPA and CFA

TiVo signs a pact with privately held Cox Communications for enhanced DVRs in select markets from the first half 2007. With an earlier Comcast deal (CMCSA), likely set for 2006 debut, this new pact with the 4th largest U.S. cabler is another key win. With its intellectual property likely enhanced by an ongoing patent suit against EchoStar (DISH), we see TiVo positioned for more mass deployment deals. Still, while terms of the Cox deal were not disclosed, we see similarly modest per-subscriber economics as Comcast's, but with long term potential for add-on offerings.

Lockheed Martin (LMT) : Reiterates 4 STARS (buy)
Analyst: Richard Tortoriello

We are raising our 12-month target price to $95 from $90. We are encouraged by Lockheed Martin's portfolio of both ongoing military and other government programs and potential program wins. Major potential opportunities include a large contract for Air Force search & rescue helicopters, Homeland Security's Secure Border Initiative, and NASA's Crew Exploration Vehicle. We also like opportunities we see for more F-16 sales to foreign allies, including Pakistan and Israel.

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report.
Standard & Poor's Regulatory Disclosure

Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.

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