Markets & Finance

S&P Ups Forest Labs


Forest Labs (FRX): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Herman Saftlas

S&P says its upgrade is based on the company's potential new Alzheimers' drug.

A Phase III study showed memantine in combination with Pfizer's Aricept was able to improve cognition, in contrast to present treatments that only temporarily slow progression of the disease. If a new-drug application is approved, memantine could (with fast track review) launch by late 2003. Meanwhile, the company's recent launch of Lexapro (an enhanced form of Celexa) should enable Forest Labs to grow its $1.1 billion antidepressant franchise. Forest Labs is valued below its inherent worth based on S&P's discounted cash flow model.

Calpine (CPN): Maintains 3 STARS (hold)

Analyst: Craig Shere

The stock is down 7% as Calpine says it is considering hundreds of millions of dollars in asset sales including oil and gas properties, power sales agreements and non-strategic power assets. Calpine will accept up to 40% of consideration in the form of Calpine debt (trading at a substantial discount). Bank covenants keep Calpine from directly buying back unsecured debt. Gains and interest savings from the retirement of bonds would be a positive. Shares are trading around a third of book value, and Calpine's stock price appears to fully discount known liquidity and profit margin risks.

Genentech (DNA): Downgraded to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Frank DiLorenzo

The company announced that the Phase III trial of Avastin to treat relapsed breast cancer didn't meet the primary endpoint of progression-free survival. Though colorectal cancer is the lead indication for Avastin, the breast cancer setback decreases our confidence in the drug's approvability and potential. On our estimated 18% EPS growth rate, Genentech's 2003 p-e-to-growth ratio of 1.5X is above our biotech average of 1.3X. We are lowering our 2002 EPS estimate to $0.90 from $0.92, and our 2003 forecast to $1.04 from $1.10. With Avastin questions and lower estimates, we feel the stock is now fully valued.

Commerce Bancorp (CBH): Reiterates 5 STARS (buy)

Analyst: Evan Momios

The company's expansion in the New York City market is unfolding as planned. The stock has risen about 10% in the last month versus a flat S&P 500, but is still short of our $54-$56 price target. In recent months, Commerce has built a New York loan production team by hiring a number of seasoned lending professionals; it has six branches in the Big Apple now and plans to open four more this Fall. We continue to see 2002 EPS at $2.00 and 2003's at $2.42. At 1.0X projected 5-year growth of 20%, versus 1.3X on average for peers, the stock remains attractive and should outperform.

New York Times Co. (NYT): Still 4 STARS (accumulate)

Analyst: William Donald

The company reported August advertising for its flagship New York Times newspaper gained 3.1% from a year ago, and total newspaper group advertising rose 2.0%. Aggressive cost cutting and sharply lower newsprint costs are benefiting margins. S&P expects Q3 and full year EPS of $0.38 and $2.00, respectively, at top of company guidance. Of some concern, however, are stock option costs, which, if expensed in 2001, would have reduced EPS by 24%, or $0.30. Still, we expect the company and its peers to continue to outperform. Our 12-month target for the stock is $54.


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