Markets & Finance

S&P Says Still Accumulate Novartis


Novartis (NVS): Reiterates 4 STARS (accumulate)

Analyst: Herman Saftlas, David Seemungal

Novartis is suffering a setback as the FDA has requested more clinical data on its experimental Prexige arthritis treatment. The drug's U.S. launch, which S&P expected in 2004, is now not expected before 2005 at the earliest. Prexige was, however, approved last week in Great Britian. S&P still believes that Novartis has one of the strongest positions in the European pharmaceutical sector, with relatively low generic exposure and a robust pipeline. S&P has a 12-month target price of $47, based on a blend of discounted cash flow valuation and p-e-to-growth estimates.

International Paper (IP): Reiterates 3 STARS (hold); Georgia-Pacific (GP) and Weyerhaeuser (WY): Reiterates 2 STARS (avoid)

Analyst: Bryon Korutz

Three cardboard making companies settled two class-action suits alleging containerboard price fixing. The settlement calls for a $24 million payment by International Paper (a 2 cents charge to third-quarter earnings per share), $23 million by Weyerhaeuser (a 7 cents charge), and $21 million by Georgia-Pacific (a 5 cents charge). S&P views this settlement as positive, but isn't changing its investment recommendations. Based on expectations for lower wood products prices, and with Georgia-Pacific and Weyerhaeuser both trading above S&P's 12-month target prices, S&P would avoid both. With International Paper near the 12-month target price, S&P would hold.

McCormick & Co. (MKC): Maintains 4 STARS (accumulate)

Analyst: Richard Joy

Spice maker McCormick posted August-quarter earnings per share before special items of 29 cents, vs. 24 cents, in line with S&P's estimate. Sales from continuing operations gained 17%, reflecting 5% volume growth, a 4% currency benefit, and 8% from acquisitions. Divestitures of its packaging and British brokerage businesses were completed during the quarter. Gross margin improved 150 basis points on higher volumes, an improved mix, and supply chain efficiencies. S&P sees fiscal 2004 (Nov.) earnings per share at $1.56, a 13% gain vs. S&P's $1.38 estimate for 2003. S&P thinks the shares are attractive, given its view of McCormick's dominant market position and improving volume and margin trends.

Cisco Systems (CSCO): Maintains 5 STARS (strong buy)

Analyst: Megan Graham Hackett

Cisco's board authorized an incremental $7 billion to its stock buyback program. The aggregate prior authorization was $13 billion, of which $5.2 billion was remaining. With some $21 billion in cash and investments, S&P believes this maker of networking gear for the Internet clearly has ample resources to support the program. In addition, S&P views the authorization as a solid statement regarding Cisco's view of its prospects for growth going forward. There's no change to S&P's estimates. S&P continues to hold a 12-month target price of $25 on the shares, based on discounted cash flow and price-sales analyses.

Viacom (VIA.B): Reiterates 5 STARS (strong buy)

Analyst: Tuna Amobi

Viacom is under pressure as it trimmed the 2003 revenue and operating income growth outlook to the mid-digit to high-single-digit percent, from a high single-digit percent. It also sees low-teen to mid-teen 2003 earnings per share growth, vs. the prior mid-teens. Viacom cited the slow pace of a local advertising recovery, even as national advertising remains strong. S&P thinks Viacom should still reap sizable gains from the 2004 presidential elections and from Superbowl on its CBS network. With EBITDA now likely to grow at the low end of S&P's 13%-15% estimate, S&P's 12-month target price is $50, which is a modest premium at 12 times the enterprise value/EBITDA, vs. peers.

Inamed (IMDC): Upgrades to 5 STARS (strong buy) from 3 STARS (hold)

Analyst: Robert Gold

S&P believes there are several potential catalysts to help drive superior capital appreciation for this medical product maker's shares. Most significant, in S&P's view, would be pending FDA approval of Inamed's silicone gel-filled breast augmentation implant by early 2004, which S&P sees initially boosting annual revenues by $100 million. Inamed also hopes to start Phase III trials of a botulinium toxin-based wrinkle treatment in 2004. And sales of the Lap-Band obesity treatment device remain a key growth driver. S&P is raising the 12-month target price from $76, to $91, which assumes the 2004 p-e multiple moves to its peers' average p-e.

Lennar (LEN): Reiterates 5 STARS (strong buy)

Analyst: Michael Jaffe

Lennar set a sharply higher annual dividend payout on the company's Class A and Class B shares, to $1.00 a share, from 5 cents. The homebuilder said it wants shareholders to share more directly in its sizeable free cash flow, which it thinks gives it sufficient capacity to raise its dividend while continuing business growth. The new dividend rate will absorb less than 10% of S&P's cash flow forecast for fiscal 2004 (Nov.) before land purchases. S&P has positive views of the homebuilding industry's prospects and Lennar's business model, and maintains the 12-month target price of $108, based on a relative p-e analysis.

Coherent (COHR): Upgrades to 4 STARS (accumulate) from 2 STARS (avoid)

Analyst: Markos Kaminis

Coherent's shares now trade at 39 times S&P's 7 cents reduced fiscal 2004 (Sept.) earnings per share estimate of 68 cents, above S&P's 20% long-term growth view, but well below the growth S&P sees in fiscal 2004 of more than 200%. S&P expects growth for this maker of lasers and flat panel displays to be fueled by improving demand within the semiconductor and materials processing end markets. The shares, at 1.4 times the book value and 1.9 times sales, trade below peer multiples. Based on relative values and S&P's discounte cash flow derived value, the 12-month target price is $34, but S&P's near-term enthusiasm is tempered due to recent weakness at majority owned subsidiary Lambda Physik.


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