Markets & Finance

S&P Says Hold Merck & Co.


Merck (MRK): Reiterates 3 STARS (hold)

Analyst: Herman Saftlas

Merck's R&D pipeline is dwindling, as it announced plans to scrap its MK-767 diabetes drug trials after an incidence of cancer in mice. This follows last week's halt on the Substance P antidepressant. S&P had modeled MK-767 for sales of $150 million in 2007. On a positive note, Merck recently filed a New Drug Application for the Zetia/Zocor cholesterol agent, which S&P thinks has a $1 billion-plus potential. Its pipeline also includes vaccines for cervical cancer and herpes. S&P is lowering the 12-month target price by $2, to $47, based on revised forward

price-earnings and

discounted cash-flow analyses. Merck's 3.5% yield should provide some support.

Apria Healthcare (AHG): Reiterates 3 STARS (hold)

Analyst: Frank Connelly

Apria shares are down Friday on concerns over changes to reimbursement levels for respiratory drugs in the proposed Medicare legislation. If passed, S&P believes the legislation could knock 10 cents to 12 cents off S&P's 2004 EPS estimate of $2.46. S&P believes that the risk to respiratory drug sales offsets the benefits of continued strong demand for in-home oxygen services, at least in the near term. S&P expects shares to be volatile until the proposed legislation is settled. However, S&P thinks Apria's long-term growth story remains intact.

Affiliated Computer Services (ACS): Maintains 5 STARS (buy)

Analyst: Richard Stice

Following a competitive bidding process, Affiliated Computer has been selected to continue to provide student loan servicing for the Department of Education. The contract is valued in excess of $1 billion over five years, and could reach $2 billion over 10 years if all extensions are exercised. S&P thinks the news eliminates near-term uncertainty, since the department is Affiliated Computer's largest client, accounting for 4% of total revenue. Separately, Affiliated Computer reaffirmed the fiscal 2004 (June) guidance. S&P's 12-month target price of $63 is based on disounted-cash flow and relative p-e-to-growth analyses.

Walt Disney (DIS): Reiterates 3 STARS (hold)

Analyst: Tuna Amobi

Before a 3 cents gain on a tax settlement, Disney posted 17 cents, vs. 9 cents September-quarter earnings per share, which is 3 cents and 2 cents above S&P and the Street's estimates. Revenues rose 5% and EBITDA surged 35% on gains in motion pictures, home video, and cable network segments. S&P sees similar solid gains in fiscal 2004 (Sep.) but thinks theme parks visibility is limited and the future of the ailing Disney Stores remains unsolved. S&P is raising the fiscal 2004 earnings per share estimate by 4 cents, to 84 cents, and the 12-month target price by $2, to $26, based on a discounted cash-flow model. After a 40% price gain in 2003, Disney is trading at 12 times S&P's fiscal 2004 enterprise-value-EBITDA estimate, which is fair, vs. peers.

Gap (GPS): Maintains 3 STARS (hold)

Analyst: Marie Driscoll

Retailer Gap met S&P's third-quarter earnings per share estimate, posting 28 cents, vs. 15 cents as a 6% comp-store sales rise provided wider merchandise margins and occupancy leverage. S&P expects Gap's turnaround story to continue. S&P believes that by continued optimization of the stores' fleet and greater operational discipline as science is applied to inventory flow, and as customer insights are incorporated into products and services, Gap will have additional growth opportunities via line extensions, more full-price selling, and margin improvement. S&P's fiscal 2004 (Jan.) and fiscal 2005 earnings per share estimates are $1.09 and $1.30.

Krispy Kreme Doughnuts (KKD): Maintains 3 STARS (hold)

Analyst: Dennis Milton

Krispy Kreme reported October-quarter earnings per share of 23 cents, up 35% from a year ago and in line with S&P's estimate. Results benefited from expansion, systemwide same-store sales growth of 9.5%, and improved operating margins. S&P is raising the fiscal 2005 (Jan.) earnings per share estimate by 2 cents, to $1.23, due to accretive acquisitions of franchised units. Shares trade at 43 times S&P's fiscal 2004 earnings per share estimate of 91 cents, and 31 times S&P's fiscal 2005 estimate. S&P is maintaining the 12-month target price of $42, which reflects the intrinsic value of shares according to S&P's discounted cash-flow model.


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