Markets & Finance

S&P Raises Clorox, Unilever to Buy


Unilever N.V. (UN): Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: Sreedhar Mahamkali

We believe that Unilever will outperform over the next 12 months as the company begins to tackle the problem of poor and inconsistent growth. While we believe it will experience a significant decline in margins and earnings, sales should grow, in our view, on a realignment of the organization towards growth, enhanced innovation capability, and aggressive marketing investments. We are raising our 12-month target price to $72 from $65, based on our updated discounted-cash-flow assumptions which include free cash flow growth of 3.3%, a terminal growth rate of 2.5%, and cost of capital of 7.7%.

Clorox (CLX): Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: Howard Choe

The upgrade reflects our view of strong sales trends and increased confidence in peer-like earnings growth for at least the next few years. We think new product innovation and international growth are likely to be key drivers. Clorox posted December-quarter earnings per share of 59 cents, vs. 52 cents, 5 cents higher than our estimate. Sales growth at 9% was better than we expected, led by international markets. Margins expanded modestly. We are raising our fiscal 2005 (ending June) earnings per share estimate to $2.82 from $2.80 and our 12-month target price to $70 from $63, in line with peers at p-e of 21.5 times our calendar 2006 estimate of $3.26.

WellPoint (WLP): Reiterates 5 STARS (strong buy)

Analyst: Phillip Seligman

WellPoint posted fourth-quarter operating earnings per share of $1.70, vs. $1.43, 2 cents above our estimate. Enrollment grew 6.4% (pro forma). Medical loss ratio (MLR) rose 200 basis points to 81.5%, mainly on what we view as easy comps. WellPoint had a 270 basis points drop in fourth-quarter selling, general, and administrative cost ratio due to merger synergies. For 2005, we estimate 4% members growth, a modest MLR decline, and near-200 basis points drop in selling, general, and administrative ratio. Given this, plus WellPoint's recent forecast of $3 billion in operating cash flow, which in our view provides flexibility, we believe WellPoint should trade at a wider premium to peers. We raise our forward p-e target to 18 times from 17 times and our target price by $10 to $145.

Goodrich (GR): Reiterates 4 STARS (buy)

Analyst: Robert Friedman-CPA

This $4.7 billion-revenue global aircraft components maker posts fourth-quarter GAAP earnings per share of 30 cents, a 58% advance from year ago's 19 cents, beating our 45 cents estimate. We calculate fourth-quarter S&P Core earnings per share doubled to 32 cents. Favorable fourth-quarter earnings per share results were mostly from a 12% revenue rise and operating efficiencies. Looking at Goodrich's long-term sustainable earnings growth and profitability prospects, we are projecting that the company will be able to generate 5% to 6.5% free cash flow growth rates and 10% to 13% return on equity. Goodrich shares continue to trade at a discount to our discounted-cash-flow-based 12-month target price of $40.

Humana Inc. (HUM): Reiterates 5 STARS (strong buy)

Analyst: Phillip Seligman

Humana beats our fourth-quarter operating earnings per share estimate by 2 cents, posting 29 cents, vs. 41 cents. We are encouraged by a decline in medical loss and selling, general, and administrative cost ratios, and see more in 2005 on improving member mix and cost controls. We are also encouraged by $600 million to $650 million Humana sees for 2005 cash flow from operations, which widens flexibility and boosts our view of opportunities for its profitable commercial consumer-directed health and Medicare plans. We are raising our forward p-e to 19 times from 16.5 times, a wider premium to peers but a p-e-to-growth ratio below 1.0, and our 12-month target price by $6 to $41.

Allergan (AGN): Maintains 3 STARS (hold)

Analyst: Phillip Seligman

Allergan beat our forecast by 5 cents, posting 86 cents, vs. 66 cents fourth-quarter adjusted earnings per share. We are encouraged by a 14% pharmaceutical sales rise in constant dollars, and eyecare drugs' market share gains. We see Botox sales rising strongly on new uses and overseas penetration. But we see 2005 and early 2006 as a transition period on lower gross margin due to ramp-ups of new Botox facility and new products, and plant maintenance following mid-2005 shutdown of some plants. Assuming a wait-and-see attitude on products in front of FDA, we keep our target price of $85, 26 times our 2005 earnings per share estimate $3.25.

Martek Biosciences (MATK): Downgrades to 4 STARS (buy) from 5 STARS (strong buy)

Analyst: Markos Kaminis

Martek Biosciences' conference presentation gives us confidence that operating performance is on track and that it will soon have capacity to serve markets beyond infant formula. The company also has entered a nonexclusive agreement with a Fortune 500 consumer food products company to develop products containing its additive, with products expected to reach market in mid-2006. While short on detail, the news provides more visibility into Martek's food products potential. Based on higher cash flows seen after 2006, we are raising our discounted-cash-flow-based target price by $12 to $75, but downgrading after the price rise.

Payless ShoeSource (PSS): Upgrades to 5 STARS (strong buy) from 4 STARS (buy)

Analyst: Mark Basham

Our upgrade is based on our view of the substantial progress in Payless's restructuring, announced in August 2004. This included closure of 8% of stores, which had generated a $29 million operating loss in fiscal 2004, as well as a reduction in its overall expense structure. The company see inventories in remaining stores as well positioned for spring 2005. Due to timing of these initiatives, we are lowering our earnings per share estimate for fiscal 2005 (ending January) to 60 cents from 69 cents, and for fiscal 2006 to 80 cents from $1.00. However, our free-cash-flow projections rise. We are raising our discounted-cash-flow-based target price to $21 from $16.


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