Markets & Finance

S&P Downgrades Coach to Hold


Coach (COH): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Marie Driscoll

S&P likes the luxury accessories brand and anticipates that Coach will grow earnings at an 18% average annual clip over the next five years. However, S&P thinks these opportunities are fully reflected in the price of the shares. Trading at 40 times S&P's calendar 2003 earnings per share estimate and 32 times the calendar 2004 estimate, Coach is the most expensive branded apparel and accessories retail stock in S&P's universe. S&P's fiscal 2004 (June) and fiscal 2005 earnings per share estimates are $1.09 and $1.26, respectively. S&P reiterates the 12-month target price of $38 and would hold the shares.

Protein Design Labs (PDLI): Reiterates 3 STARS (hold)

Analyst: Frank Connelly

Protein Design and Genentech agreed in principle to resolve their dispute over the licensing of Protein Design's antibody humanization patents, including asthma drug Xolair. A signed agreement is expected by the end of December. S&P believes this resolution removes the overhang from Protein Design shares and spares the company from a potentially costly legal battle. As per the agreement, the royalty outlook, prior to the Xolair dispute, is unchanged for the next three to five years. At that time, sales are expected to hit a cumulative breakpoint, and total royalties to Protein Design would be paid at reduced rates.

Systems & Computer Technology (SCTC): Maintains 4 STARS (accumulate)

Analyst: Markos Kaminis, Mark Basham

Systems & Computer's margins are being boosted by its efforts to fortify its leading position in the provision of technology solutions to educational institutions. As a result, S&P thinks the company, focused on providing a broad array of solutions to schools and following the divestiture of its non-core product lines in recent years, merits a higher valuation closer to its peer group, which recently had an average

price-earnings of 36, vs. Systems & Computer's p-e of 21. S&P is raising the 12-month target price to $18, from $15.

Boeing (BA): Reiterates 5 STARS (buy)

Analyst: Robert Friedman

Boeing CEO Phil Condit resigned, effective immediately. While it was termed a resignation, the company made it plain that Mr. Condit had been forced out. Last week the defense contractor fired two top executives, chief financial officer Mike Sears, and Darleen Druyun, vice president of missile-defense systems, after Sears improperly offered Druyun a job in the fall of 2002 when she was a top U.S. Pentagon official. The Pentagon took $1 billion worth of satellite launches away from Boeing earlier this year after an investigation showed the company used trade secrets stolen from rival Lockheed Martin to help win the launches. Although scandals continue to take a toll on Boeing's top management, S&P doesn't think these events will jeopardize existing or pending defense contracts. S&P believes that Boeing's defense offerings are vital to the Pentagon's ongoing transformation process, and thinks the Pentagon will continue to buy Boeing's F-18's, C-17's, and next-generation tankers. Moreover, S&P's long-term free cash compound annual growth rate already reflects the mediocre economics of Boeing's civil and defense businesses. S&P is keeping the $50 12-month target price.

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

Analyst: Tuna Amobi

The nephew of Disney's founder, Roy E. Disney, 74, resigned as vice chairman and director due to a new mandatory rule that requires directors to retire at age 72. In a reportedly harshly worded letter to the Disney board, he also called for chairman and CEO Michael Eisner's resignation or retirement amid lingering disenchantment with Disney's stock in the last few years. S&P notes that Eisner has survived previous calls for his outster. Still, S&P thinks corporate governance issues should be the key focus of a two-day board meeting starting today, which will likely influence Disney's near-term price. S&P is keeping the $26

discounted cash-flow target price.

Rare Hospitality (RARE): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Dennis Milton

With the recent improvement in economic trends and strong customer traffic at newly-opened restaurants (Rare's operations include LongHorn Steakhouse, Bugaboo Creek Steak House, and The Capital Grille), S&P thinks Rare Hospitality will maintain its recent sales momentum into 2004. S&P is raising the 2004 earnings per share estimate by 6 cents, to $1.37 -- a 15% increase from S&P's 2003 earnings per share estimate of $1.19. At 18 times S&P's 2004 estimate, the shares trade at a slight premium to peers. However, given the company's strong expansion prospects, the shares should continue to appreciate. S&P's 12-month target price of $30 is based upon a forward p-e of 22 applied to S&P's 2004 earnings per share estimate.


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