Markets & Finance

S&P Downgrades Avon


Avon (AVP): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Howard Choe

Our downgrade is driven by lack of profit visibility for Avon's U.S. division. The company sees a 3% fall in fourth-quarter sales, and a mid-teen profit decline. This drop is attributed to planned attrition of some non-beauty items, and to lower consumer spending. Given our view of a lack of near-term catalysts for U.S. consumer spending, we expect weakness in the domestic segment to continue near-term. We still view Avon's overall global growth prospects as healthy, but see U.S. weakness as a cloud on the stock. Given our view of greater risk, we are lowering our 12-month target price to $42 from $55.

Bristol-Myers Squibb (BMY): Reiterates 2 STARS (avoid)

Analyst: Herman Saftlas

Bristol-Myers's third-quarter non-GAAP earnings per share of 44 cents, vs. 48 cents, is 5 cents above our estimate. Revenue rose 1% on a foreign exchange impact, above our projection, driven by a 30% rise in Plavix and a 32% rise in Avapro/Avalide, and new products. But we see fourth-quarter earnings per share falling 20% from the third quarter on declining sales of Pravachol and worsening generic erosion. We continue to expect patent expiration hits of $1.2 billion annually to result in flat to lower earnings per share over the next three years. We are also unsure of the viability of the $1.12 dividend payment, currently yielding 4.7%. Our 12-month target price is $21, based on our relative p-e and discounted-cash-flow models.

Sony (SNE): Reiterates 5 STARS (buy)

Analyst: John Yang

Sony's September-quarter results significantly exceeded our expectations, with operating income of $405 million, compared with our projected $329 million, mostly on solid movies such as Spiderman 2, strong contributions from financial businesses, and continuing benefits from recent restructuring. In the second half fiscal 2005 (ending March), we expect games and electronics divisions to grow 7% and 3%, respectively, aided by a new handheld PlayStation Players and flat-panel displays. Our fiscal 2005 and fiscal 2006 earnings-per-share estimates are $1.19 and $1.94. Based on discounted-cash-flow and relative valuations, our 12-month target price remains $47.

Allstate (Allstate): Maintains 5 STARS (buy)

Analyst: Catherine Seifert

Allstate said it received a subpoena from the Connecticut Attorney General, seeking information regarding how Allstate prices its insurance products. Allstate is not being accused of any wrongdoing and said it is cooperating in this ever-widening investigation. Although this probe tempers our outlook, we would note that Allstate sells most of its products through its own agency system (vs. brokers) and that Allstate sells mostly commodity products (auto and homeowners'), where a competitive market has impacted premium prices more than any alleged manipulation, in our view.

Aon (AOC): Maintains 2 STARS (avoid)

Analyst: Gregory Simcik, CFA

Aon posted third-quarter earnings per share from continuing operations of 36 cents, vs. 45 cents, 14 cents below our estimate. Total revenues missed our forecast by 3.3%, while total expenses were in line. Based on current results, the softer property casualty market, and changes in its business model, Aon has abandoned its previous guidance for earnings per share of $2.20 or greater in 2004. We are placing our estimates under review and will provide an update following the call.

Royal Dutch Petroleum (RD): Reiterates 3 STARS (hold)

Analyst: Tina Vital

Royal Dutch/Shell Group (60% owned by RD) posted third-quarter CCS earnings (adjusted for current cost of supplies) of $4.407 billion, vs. $2.593 billion, beating our estimate by $1.003 billion. Hydrocarbon production was about flat and 2004 spending was cut by $0.5 billion to $1.5 billion, to $14 billion. We see more revisions to proved reserves, likely reducing estimates by 900 million barrels of oil equivalent. We think the Royal Dutch's structure should benefit from agreement to unify under a single U.K. parent. We are raising our 2004 earnings per ADR estimate by 86 cents to $5.16, and 2005 earnings per ADR by $2.24 to $5.88. A blend of discounted-cash-flow and multiple valuations leads us to raise our target price by $6 to $56.

Alliance Capital (AC): Reiterates 3 STARS (hold)

Analyst: Robert Hansen, CFA

Alliance Capital's third-quarter earnings per share of 52 cents, vs. 57 cents, was below our 56 cents estimate, hurt by higher general, administrative, and compensation expenses, as well as by weak transaction revenue and performance fees. We think Alliance maintains a competitive advantage in international and blend products, but we see inconsistent client flows in 2005. We are lowering our 2004 earnings-per-share estimates to $2.20 from $2.25, and 2005's to $2.30 from $2.45. Our 12-month target price stays at $37. At 16 times our 2005 earnings-per-share estimate, this is a discount to peers. We view current share price level as appropriate and would not add to positions.

Qualcomm (QCOM): Reiterates 5 STARS (buy)

Analyst: Kenneth Leon, CPA

We see Qualcomm's news, that it is changing its accounting for royalty revenue recognition, already reflected in the share price. Qualcomm completed its review and has decided to move away from estimated royalty fees one quarter ahead of actual bookings. The company says it will book a one-time charge in the Sept. quarter when it reports next Thursday, but the accounting change will have no impact on operating cash flow or the economics of the firm's licensing business. With $7 billion to $8 billion of cash, no debt, and growing faster than peers, we would buy Qualcomm despite its premium valuation.


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