Markets & Finance

Upgrading Cephalon to 'Buy'


Cephalon (CEPH): Upgrades to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Frank DiLorenzo

On the heels of solid Q4 and relative to peers, S&P feels Cephalon is undervalued. The company has superior growth prospects vs. the biotech sector and the general market. On S&P's estimates of 2003 EPS at $1.42 and EPS growth rate at 32.5%, Cephalon's 1.3 ratio of price-earnings-to-growth is attractive compared with a 1.5 ratio for the profitable biotech group, as well as the group's average EPS growth rate of 25.7%. Based on S&P's net present value analysis of Cephalon's products and pipeline, S&P feels shares are worth closer to $80 rather the $60 level of current trading.

Pall Corp. (PLL) to hold from accumulate, based on earnings warning.

Analyst: Stewart Scharf

Pall expects weak U.S. industrial markets for one or two more quarters. It now sees $0.14-$0.16 Q2 EPS, vs. a year-earlier's $0.20. The soft global semiconductor sector and the weak yen also are impacting results. A pact to acquire US Filter's filtration and separations group will add $270 million to sales. The gradual economic recovery should aid Pall's microelectronics business, but with uncertain markets in the near term, S&P views shares as fairly valued. S&P cut the fiscal 2002 (July) estimate by $0.10, to $1.02, and cut the fiscal 2003 estimate by $0.25, to $1.20.

Computer Associates (CA): Still 3 STARS (hold)

Analyst: Jonathan Rudy

The shares have come under pressure following articles in the New York Times and Newsday stating that federal prosecutors have begun a preliminary inquiry into whether CA violated federal criminal fraud laws through its accounting practices. The company says it has not been contacted by authorities regarding any investigation and does not know what is being investigated. Despite the confusion created by CA's new business model, S&P believes it is premature to draw any conclusions of fraud at this point. With solid operating cash flow and the shares trading at a discount -- two times sales -- CA remains a "hold."

Fairchild Semiconductor (FCS): Reiterates 5 STARS (buy)

Analyst: Megan Graham-Hackett

Fairchild preannounced better-than-expected Q1 revenues due to improving order rates. The company sees Q1 revenue flat vs. Q4, better than its prior guidance of down 3-5%. It noted that bookings have been better than expected in power analog and power discrete chips for PCs and consumer electronics. Fairchild also said its book-to-bill ratio was running well above 1:1. Still, with pricing pressure persisting, gross margin was likely down 100 to 150 basis points vs. Q4. S&P is conservatively keeping its Q1 loss estimate at $0.01. With an improving outlook -- and with the stock trading at a price-to-sales ratio of 1.8, below its peers -- Fairchild remains undervalued.

IDEC Pharmaceuticals (IDPH): Maintains 4 STARS (accumulate)

Analyst: Frank DiLorenzo

The company announced that its Zevalin anti-cancer drug received FDA approval for the treatment of patients with B-cell non-Hodgkin's lymphoma that are refractory to Rituxan. Zevalin was also granted accelerated approval for relapsed or refractory patients to Rituxan treatment. S&P expects the drug to launch by Q2. S&P is conservatively maintaining its 2002 EPS estimates at $0.84 for 2002, $1.19 for 2003, $1.54 for 2004, but those forecasts could see upside on a strong Zevalin launch. Based on the net present value of drugs/pipeline, the stock remains attractive.


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