Markets & Finance

S&P Says Still Accumulate Pfizer as New Impotance Drugs Enter the Market


Pfizer (PFE) and Lilly (LLY): Maintains 4 STARS (accumulate); and GlaxoSmithKline (GSK): Maintains 3 STARS (hold)

Analyst: Herman Saftlas

With Tuesday's FDA approval of Glaxo/Bayer's Levitra, S&P says Pfizer is losing its monopoly of the U.S. erectile dysfunction market. Pfizer shares fell Wednesday on the news. The side-effect profile of the new drug is similar to Pfizer's Viagra, but it has a faster onset of action. S&P expects FDA approval for a third erectile dysfunction drug, Lilly's Cialis, before year-end. That drug's key advantage is its duration of up to 36 hours. S&P sees the new entrants doubling present a $2 billion global market by 2007, but thinks U.S. Viagra sales will likely be flat at about $1 billion over the next few years.

ATMI (ATMI), Cymer (CYMI), and Teradyne (TER): Reiterates 5 STARS (buy)

Analyst: Richard Tortoriello

S&P says the semiconductor equipment sector's book-to-bill ratio continued a slow ascent in July. The sector's preliminary three-month moving average rose to 0.97 from 0.93 in June. Also, orders rose 6% in July vs. June, the first monthly increase in four months. A number of companies in S&P's semiconductor equipment universe expect improving orders over the next few months, and S&P believes the industry has stabilized and order trends will improve into 2004. Also, chipmakers that are guiding for growth in the third quarter include ADI and Intel.

Rayonier (RYN): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Bryon Korutz

Rayonier announced a plan to convert from a C-Corp. into a real estate investment trust effective Jan. 1, 2004. It estimates, based on the current market conditions for timber, that it will generate $110 million in distributable income in 2004, or $2.34 a share. Based on this figure and using an estimated 6.0% dividend yield, S&P values the stock at $39. However, with interest rates rising, housing starts could decline, which could lower the projected 2004 dividend. With the stock near S&P's 12-month target price of $39 and S&P's view that the new strategy will unleash value to shareholders, S&P would now hold Rayonier.

Dillard's (DDS): Reiterates 1 STAR (sell)

Analyst: Jason Asaeda

Dillard's posted a July-quarter operating loss per share of 35 cents vs. earnings per share of 15 cents -- 27 cents worse than S&P's estimate. Results were hurt by heavy markdowns because of a sales decline, which was partly offset by reduced payroll and advertising costs. Based on weak sales momentum and above-plan inventories, S&P anticipates further markdown exposure over the next few quarters. As a result, S&P now sees an operating loss of 18 cents in fiscal 2004 (Jan.), vs. S&P's prior 74 cents operating earnings per share estimate. Given the worsened outlook for a company that lacks, in S&P's view, a strong turnaround strategy, S&P recommends selling Dillard's shares.

Hewlett-Packard (HPQ): Maintains 3 STARS (hold)

Analyst: Megan Graham Hackett

H-P posted proforma July-quarter earnings per share of 23 cents, 4 cents below S&P's estimate, on revenues of $17.35 billion, also a bit below S&P's model. The bulk of the earnings shortfall vs. S&P's model owed to gross margin, which was 100 basis points below S&P's estimate as H-P admitted it priced desktops too aggressively. Weak operations in Europe and Japan, and product transitions, also hurt results. H-P sees October-quarter revenues of $18.8 billion to $19.1 billion, and earnings per share of 34 cents to 36 cents, matching S&P's model. S&P is cutting the fiscal 2003 (Oct.) earnings per share estimate by 4 cents, to $1.16. With shares approximating S&P's 12-month target price of $22, based on a discounted cash flow analysis, S&P says hold H-P.

Photronics (PLAB): Maintains 4 STARS (accumulate)

Analyst: Richard Tortoriello

Photronics' July-quarter earnings per share of 7 cents (before 3 cents in bond redemption charges) vs. 4 cents, is 7 cents ahead of S&P's estimate. Sales fell 8%, but rose 6% from the April quarter. selling, general, and administrative expenses fell 7% vs. the April quarter, while gross margin rose to 31.4% from 26.6%. Sales from the 130nm mask sets rose 60% but were only 10% of total sales. S&P thinks Photolab has done an excellent job boosting efficiency, with earnings per share above expectations by 7 cents or more in the past three quarters. S&P expects the chip design cycle to accelerate with the improving economy going into 2004, and views Photronics as attractive at 2.0 times sales vs. the 10-year average of 2.4.

Patterson Dental (PDCO): Reiterates 4 STARS (accumulate)

Analyst: Massimo Santicchia

The July-quarter earnings per share of 43 cents vs. 37 cents is 2 cents below S&P's estimate. Sales grew 12%, slightly below S&P's forecast, driven by equipment and software sales and by robust demand for CEREC systems. Gross margin unexpectedly narrowed 100 basis points. However, cash flow from operations was $56 million, aided by improved days receivables outstanding. S&P is trimming the fiscal 2004 (April) estimate by 4 cents, to $2.00. S&P's estimate does not include the accretion effect from the AbilityOne acquisition, which is expected to be completed in the third quarter. Discounted cash flow analysis supports S&P's target price of $57.


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