Mylan Labs (MYL): Downgrades to 3 STARS (hold) from 5 STARS (buy)
Analyst: Herman Saftlas
S&P expects ongoing sales of Mylan's generic Prilosec to come under heavy pressure from Procter and Gamble's recently launched over-the-counter Prilosec. As a result, S&P thinks Mylan has become increasingly dependent on planned new products such as generic versions of Johnson & Johnson's Duragesic and Levaquin, which remain entangled in complex litigation. Given S&P's view of significant risks and uncertainties with respect to litigation outcomes, S&P is lowering the target price by $12, to $25, which is derived by applying the average generic multiple to the $1.28 fiscal 2005 (Mar.) earnings per share estimate.
Oracle (ORCL) and PeopleSoft (PSFT): Reiterates 3 STARS (hold)
Analyst: Jonathan Rudy
Oracle may abandon its buyout bid if PeopleSoft continues to offer its customers licensing fee refunds should Oracle's buyout succeed. Oracle has asked a Delaware court to speed action on an injunction against this program, which has been offering customer refunds of two times to five times their software licensing fees if an acquirer fails to meet certain conditions. PeopleSoft said last month that the potential liability was about $800 million. Despite both stocks trading at a discount to peers on p-e and p-e-to-growth metrics, S&P wouldn't add to positions amid the uncertainties of this situation.
Pacific Sunwear (PSUN): Maintains4 STARS (accumulate)
Analyst: Michael Driscoll
Pacific Sunwear exceeded S&P's October-quarter earnings per share estimate of 27 cents, reporting 31 cents vs. 21 cents. Operating margin widened 260 basis points as same-store comparison rose 13.2% and total sales rose 23%. Girls', accessories, and footwear drove results, but boys' showed positive mid-single digit results. November same-store sales momentum remains in the double digits. S&P envisions that in fiscal 2005 (Jan.), Pacific Sunwear will again post double-digit earning growth based on another 100 new stores, 5% comparisons, and leveraging fixed costs. S&P is raising the fiscal 2004 earnings per share estimate to 97 cents, from 90 cents, and is upping fiscal 2005's to $1.20, from $1.13.
AmeriCredit (ACF): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)
Analyst: Michael Morgan
S&P's downgrade reflects shares reaching the 12-month target price of $14. The company's October data released Monday showed improving delinquency and net charge-off trends, but S&P expects seasonal weakness over the next few months, which may limit upside in the near term. S&P is maintaining the fiscal 2004 (June) earnings per share estimate of 95 cents. S&P's 12-month target price of $14 is based on 1.1 times S&P's 2004 book value estimate of $13, which S&P believes is appropriate, given the risks associated with AmeriCredit's turnaround efforts.
Vertex Pharmaceuticals (VRTX): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)
Analyst: Frank DiLorenzo
Vertex and partner Aventis halted a Phase IIb trial of Pralnacasan because of liver abnormalities in animal studies. S&P views this as a major setback; S&P saw Pralnacasan as Vertex's most valuable pipeline candidate. Vertex will start a pivotal trial of Merimepodib to treat hepatitis C, though S&P views this as minor opportunity. Vertex also reported a third-quarter loss per share of 58 cents, vs. a loss of 44 cents, 5 cents worse than S&P's estimate. S&P thinks the company needs to be realistic, and needs to sharply cut the R&D budget. On a revised net present value, S&P is lowering the 12-month target price to $11, from $18.
Berkshire Hathaway (BRK.A): Maintains 4 STARS (accumulate)
Analyst: Catherine Seifert
Berkshire posted $881, vs. $378 third-quarter operating earnings per share. Results were aided by some recent acquisitions, but core insurance profitability was mixed. The GEICO insurance unit had 18% higher premiums, though underwriting profits were impaired by certain adverse claim trends. Overall insurance group profitability improved amid a turnaround at General Re. S&P is keeping the $3,200 2003 operating earnings per share estimate, but is raising 2004's by $84, to $3,584. S&P's outlook is tempered by Berkshire's premium p-e, but the 12-month target price of $89,600 assumes a premium valuation will continue.