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Get Four
|  | JANUARY 4, 2006
 S&P STOCK PICKS & PANS S&P Downgrades Office Depot, Pep Boys, Papa John's, CosiAnalyst Michael Souers says Office Depot's stock now trades well above calculations of intrinsic value. Plus: Symantec stays at hold and Qualcomm remains a buyPep Boys (PBY ): Cuts to 2 STARS (sell) from 3 STARS (hold) Analyst: Michael Souers Shares have spiked about 20% in the past two months despite a deterioration of fundamentals, in our view. Given the flurry of calendar 2005 Merger & Acquisition activity in retail, we believe there is speculation that Pep Boys is a potential acquisition candidate. But we think that Pep Boys's large format store size and service bays make it unlikely that its competitors will show much interest, thus making an acquisition likely only as a real estate play for private investors. While this is conceivable, we don't think it is likely at current levels. We maintain our target price of $13. Papa John's (PZZA ): Cuts to 2 STARS (sell) from 3 STARS (hold) Analyst: Dennis Milton December quarter same-store sales rose 9.9% year-to-year at company-owned stores and 5.5% at franchisees, slightly ahead of our estimates. We are raising our 2005 earnings per share estimate by 7 cents to $2.68, 2006's by 4 cents to $2.89, and our 12-month target price by $3 to $55 in order to reflect strong sales trends. However, Papa John's shares have surged more than 20% over the past three months, and at 22 times our 2006 estimate, are now at a significant premium to peers. Given what we view as Papa John's's tepid expansion prospects, we believe the shares are overvalued and have a sell recommendation. Office Depot (ODP ): Cuts to 2 STARS (sell) from 3 STARS (hold) Analyst: Michael Souers Office Depot shares rose over 80% in 2005, including a nearly 30% gain over the past 3 months, and the stock now trades well above our calculations of intrinsic value. While we expect continued focus on expense management to drive bottom-line results, we think limited top-line growth potential will harm the shares at some point. We are maintaining our 2005 and 2006 earnings per share estimates of $1.36 and $1.56, respectively, as well as our target price of $26. Cosi (COSI ): Cuts to 1 STAR (strong sell) from 3 STARS (hold) Analyst: William Mack, CFA We still forecast fourth quarter same-store sales growth of 6.5%, but based on anecdotal evidence, we now expect slower consumer spending patterns and more difficult comparisons to make Cosi's 2006 gains harder to achieve. Our 2005 loss estimate remains 27 cents per share, but we are widening our 2006 forecast to a loss of 25 cents from 15 cents. We now see this slower growth further impacting Cosi's franchising efforts, which are a key to its growth. We are lowering our target price to $7 from $11. Symantec (SYMC ) : Maintains 3 STARS (hold) Analyst: Gary McDaniel Symantec agrees to acquire IMlogic, a provider of security and archival solutions for instant messaging. We see IMs becoming a more important communication medium for enterprises as well as consumers, and therefore an increasingly attractive target for malicious attacks. The acquisition, expected to close in the first quarter subject to approvals, should make Symantec the first vendor to package email and IM solutions together, in our view, adding to its relative attractiveness to customers. We believe integration issues should be minimized, as Symantec and IMlogic have partnered on various initiatives. Qualcomm (QCOM ): Reiterates 4 STARS (buy) Analyst: Kenneth Leon, CPA We see video streaming as the next big trend in wireless. Samsung has announced that it will introduce new handsets that include Qualcomm's MediaFLO technology for streaming video and multicast packet data. These new phones will have a two megapixel camera with flash, video compression, audio support and an external memory slot. In December, Verizon Wireless said it will launch MediaFLO in about 50% of its covered markets for real-time TV services. Samsung and Qualcomm are strategic partners for Verizon Wireless. Priced above peers but growing faster, we find Qualcomm shares attractive.  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. 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