S&P Stock Picks and Pans

S&P Cuts IT Sector, Boosts Consumer Staples

Plus: Analysts start coverage of Nitromed and Tata Motors, and more

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From Standard & Poor's Equity Research
Information Technology Sector (MRVL): Cuts to Underweight from Marketweight
Analyst: Sam Stovall

Year to date through July 12, the S&P Information Technology Index, representing 14.5% of the S&P 500, was down 11.3% vs. the S&P 500's 0.4% gain. The sector's 2006 operating earnings per share (EPS) growth is projected at just 4%, vs. 12% for the S&P 500. Yet this cyclical sector's price-to-earnings on estimated 2006 operating EPS continues to trade at a 31% premium to the 500's p-e of 14.9 times. Given heightened investor concern over limited second half 2006 EPS visibility, as a result of a projected decline in economic growth in general and consumer spending in particular, we think investors will move toward more defensive sectors.

Consumer Staples Sector (HSY) : Ups to Overweight From Marketweight
Analyst: Sam Stovall

Our upgrade is based largely on what we regard as the sector's defensive attributes in light of increasing concerns regarding slowing economic and EPS growth in the second half of 2006. Given inelastic demand for many of the products sold by companies in the Consumer Staples sector, we believe it will continue to benefit from the current "flight to quality" in the U.S. equity market. The sector has the highest S&P Quality Ranking in the S&P 500 index, with 77% of its universe ranked A- or higher. Lastly, the sector's market cap-weighted S&P STARS average of 4.4 is the highest of all S&P 500 sectors.

TXU (TXU) : Cuts to 3 STARS (hold) from 4 STARS (buy)
Analyst: Justin McCann

With TXU shares up 20% year-to-date, we expect a reduced level of return from the stock's current value. We believe shares have benefited from the long-term potential of TXU's planned expansion of its coal operations. However, we are reducing our 2007 earnings per share (EPS) estimate by 10 cents to $5.50 to reflect purchased power and operating costs related to next year's 75-day refueling outage at TXU's nuclear unit. We are keeping our EPS estimates of $1.37 for the second quarter and $5.55 for full 2006. Our 12-month target price rises to $63.

Icagen (ICGN) : Starts at 3 STARS (hold)
Analyst: Mark Basham

Biopharmaceutical company Icagen focuses on drug development and commercialization for ion-channel targets throughout the human body. Its lead product candidate ICA-17043 is in Phase III clinical testing for treatment of sickle cell anemia in adults. With both orphan-drug and fast-track approval status for ICA-17043 at the Food and Drug Administration, we believe Icagen and partner McNeil Labs could be applying for marketing approval in the first half of 2008. Our 2006 loss estimate is $1.35, and we see a $1.10 loss in 2007. Based on peer comparisons, our 12-month target price is $6.

Nitromed (NTMD) : Starts at 2 STARS (sell)
Analyst: Jeffrey Loo, CFA

Nitromed sells BiDil, a treatment for heart failure in self-identified black patients. We are concerned about BiDil sales growth, as many third-party payers have BiDil under their tier 3 formulary, which carries the highest co-payment rates and thereby potentially makes BiDil unaffordable to some patients. We also have concerns about the internalization of Nitromed's sales force and the elimination of its discovery unit. We see 2006 loss per share of $2.64. Our 12-month target price is $3, assuming a 30% discount rate and commercialization of BiDil XR by 2010.

Tata Motors (TTM) : Starts ADRs at 3 STARS (hold)
Analyst: Efraim Levy, CFA

We are initiating a hold opinion on this India-based manufacturer of automobiles, settinga 12-month target price of $18, and estimating $1.33 EPS per ADS for fiscal 2007 (Mar.). Our target price applies a p-e multiple of nearly 14 times that estimate, based on historical and peer p-e multiples. Sharp moves in the sometimes-volatile Indian stock market could affect the company's share price, despite what we view as favorable fundamental trends for thecompany and the automotive industry. With a dividend currently yielding 1.6%, we would hold Tata Motors for total return potential.

Amerus Group (AMH) : Maintains 3 STARS (hold)
Analyst: Frank Braden

Amerus Group agrees to be acquired by Aviva plc for $69 a share cash, subject to necessary approvals. The offer price is a 20% premium over the average closing price of Amerus Group shares over the past 30 days. The deal offers Aviva a greater presence in the U.S. annuity markets and unites Amerus Group with a firm with global brand recognition. The $69 offer price also represents 1.6 times first quarter book value, excluding accumulated other comprehensive income, a slightly lower premium than we had expected. Shareholders are expected to vote on the transaction in the fourth quarter of 2006, with a possible close date before the year end.

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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