S&P Stock Picks and Pans

S&P Lifts Apple to Strong Buy

Plus: Analyst moves on AXA, Beazer Homes, and Salesforce.com

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From Standard & Poor's Equity Research
Apple Computer (AAPL): Upgrades to 5 STARS (strong buy) from 3 STARS (hold)
Analyst: Megan Graham-Hackett

Our upgrade comes after the recent pressure on AAPL shares. Our discounted cash-flow analysis, which assumes a weighted-average cost of capital of 11.8% and a 10% 15-year free cash flow growth forecast, remains intact but we are adjusting our price/sales analysis to include a calendarized 2007 revenue estimate. We believe Apple can trade at 2.5 times this estimate, based on our view of its strong cash position, faster growth than peers, and its unique position to capture the digital home market, an opportunity we see emerging in 2008-09. Blending these metrics raises our target price to $72 from $68.

AXA (AXA): Upgrades ADRs to 4 STARS (buy) from 3 STARS (hold)
Analyst: F. Braden

AXA definitively agrees to acquire Credit Suisse Group's insurance unit Winterthur Group for 12.3 billion Swiss francs in cash, about US$9.96 billion, which is 11.6 times Winterthur's reported 2005 net income. We see the planned deal as adding some diversification in Switzerland, and in Central and Eastern Europe, and expect cost savings to come from overlapping operations. We think AXA will benefit from Winterthur's network of agents and access to Credit Suisse Group's retail network. AXA expects the deal to be accretive to adjusted EPS from 2007. Our 12-month target price remains $39.

Beazer Homes (BZH): Downgrades to 1 STARS (strong sell) from 2 STARS (sell)
Analyst: William Mack, CFA

With only a few months left in Beazer's fiscal 2006 (Sep.), we continue to expect it will achieve our recently reduced $10.15 EPS forecast. However, we now believe recent order declines for new homes will not soon reverse, and in fact, will give rise to deeper operating margin diminution next year than we had projected. Thus, we are lowering our fiscal 2007 EPS estimate by 50 cents, to $9.40. We are also concerned by Beazer's leverage ratio, now above 50%, and potential overhang from a 20% jump in land inventory in the past six months. Our 12-month target price declines $5, to $40, near Beazer's book value.

Salesforce.com (CRM): Upgrades to 4 STARS (buy) from 3 STARS (hold)
Analyst: Zaineb Bokhari

The company's shares have declined 21% year-to-date, and now offer attractive upside potential to our 12-month target price of $34. We expect fiscal 2007 (Jan.) revenue to rise 56% to $483 million and are setting our fiscal 2008 forecast 42% higher at $685 million. While subscriber growth remains a key driver, we are increasingly optimistic that the company's AppExchange will drive growth in revenue earned per average customer. Our fiscal 2007 EPS estimate stays at one cent and we see 24 cents in fiscal 2008; figures for both years are after 17 cents in projected option expense. Our target price is based on a 5.6 times enterprise value-to-our fiscal 2008 sales estimate.

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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