Markets & Finance

S&P Downgrades Anheuser-Busch, Wendy's


Anheuser-Busch (BUD): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Anishka Clarke

A 2.7% drop in first-quarter shipments and 1% lower retail sales are below our estimates, hurt by what we see as successful competition from spirits and wines. Anheuser-Busch will increase its marketing in 2005. We think this will have little effect on volumes and will limit margins. We see domestic pricing deteriorating near term and only international sales supporting top-line growth. Aided by share buybacks, we are lowering 2005 earnings per share estimate to $2.80 from $2.96. We lower our target price to $49 from $56. Based on our view of Anheuser-Busch's ability to support marketing and capitalize on growth opportunities overseas, hold.

Wendy's International (WEN): Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Dennis Milton

First-quarter same-store sales fell 5.1%, year to year, at company-owned Wendy's stores, and by 3.9% to 4.2%, at franchised units. However, same-store increased 3.2% to 3.4% at Tim Horton's Canada and 5.5% at Tim Horton's U.S. We are lowering our 2005 earnings per share estimate by 19 cents to $2.22, 2006's earnings per share estimate by 12 cents to $2.51, and our 12-month target price by $4 to $41, reflecting slower sales trends and company guidance on food costs. At 17 times our 2005 estimate, shares trade in line with peers. Despite our view of Wendy's strong growth prospects, we think valuation is appropriate, given recent sales difficulties.

Research in Motion (RIMM): Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: Kenneth Leon, CPA

The maker of the BlackBerry email device posted February-quarter EPS of 71 cents, vs. 15 cents one year earlier, before special items, above our 64-cent estimate. Global demand and better-than-expected BlackBerry unit volume shipments boosted

sales. While fourth-quarter sales were only in line with our target, we project 48% sales growth for fiscal 2006 (ending February). RIMM is guiding for a higher fiscal 2006 tax

rate, so we are lowering our EPS estimate to $2.60 from $3.15.

However, we are raising our 12-month target price to $84 from $78, based on a p-e of 32 times our fiscal 2006 estimate, in line with peers. Given our view that RIMM is growing faster than its peers, we find the stock attractive.

Genentech (DNA): Reiterates 5 STARS (strong buy)

Analyst: Frank DiLorenzo, CFA

DNA and partners Biogen Idec and Roche announce that results from Phase III rheumatoid arthritis trial of Rituxan plus methotrexate showed statistically significant improvement in disease relative to methotrexate alone. While specifics were not released, we think results will be strong enough to potentially lead to an FDA filing in rheumatioid arthritis in 2006. We still see 2005 earnings per share for DNA at $1.08 and 2006 at $1.45. On net present value analysis, which assumes peak Avastin sales above $5 billio by 2011 with Rituxan sales above $3.5 billion, our 12-month target price remains $71.

MCI Inc. (MCIP): Maintains 3 STARS (hold)

Qwest Communications (Q): Maintains 2 STARS (sell)

Verizon Communications (VZ): Maintains 4 STARS (buy)

Analyst: Todd Rosenbluth

As we expected, MCI rejects the newest offer from Qwest Communications, preferring to merge its long distance assets with Verizon Communications. In accepting a lower price per share from Verizon, MCI says it focused on the certainty of closing the deal, Verizon's capital structure strength, and realistic synergies. We believe that the future of MCI will be decided by its shareholders at an upcoming vote, and later by regulators. We are reviewing our expectations for Qwest as a stand alone entity, given our view of its relatively high leverage and weak margins.

Eastman Kodak (EK): Reiterates 3 STARS (hold)

Analyst: Richard Stice, CFA

Eastman Kodak announces that it has completed its previously disclosed accounting review. As a result, the company is reducing its 2004 operational earnings per share by 32 cents, to $2.30, largely to reflect income tax adjustments. We are disappointed in the magnitude of the change, but believe the conclusion of the examination will help to alleviate investor concerns regarding Eastman Kodak's accounting controls. Although we think Eastman Kodak has made substantial progress in executing its digital strategy, we believe this is already reflected in its current share price. Our 12-month target price remains $36.

Human Genome Sciences (HGSI): Maintains 3 STARS (hold)

Analyst: Frank DiLorenzo, CFA

Human Genome Sciences announced positive Phase II results for LymphoStat-B in rheumatoid arthritis, with patients taking the drug showing a 31% disease improvement based on American College of Rheumatology ACR 20 scores, compared to 17% for patients not receiving the drug. While this is favorable, we think best-case scenario based on data thus far would be for potential third-line treatment, assuming further successful development. However, signs of efficacy increase our confidence that LymphoStat-B may have a positive outcome in Phase II lupus trial, with results expected this fall.

Network Appliance (NTAP): Reiterates 3 STARS (hold)

Analyst: Richard Stice, CFA

The company announces an OEM agreement with IBM Corp. that will allow IBM to offer Network Appliance's full suite of products in a private label arrangement. Network Appliance does not expect any material revenue impact until 2006. We are encouraged by what we see as the benefits to Network Appliance from new customers, distribution and geographic channels. However, with its shares trading at a notable premium to the S&P Computer Storage and Peripheral sub-industry, combined with our view of potential constraints related to disk drive shortages, we think further potential upside for Network Appliance shares is limited.

Monsanto (MON): Reiterates 1 STAR (strong sell)

Analyst: Andrew West, CFA

Monsanto posted February-quarter earnings per share from continuing operations of $1.36, vs. 58 cents, just below our $1.37 forecast. Sales rose 27%, reflecting higher revenues from corn and soybean traits in the U.S., corn in Europe-Africa, and Roundup and herbicides outside the U.S. We are increasing our profitability outlook for Monsanto, and raising our operating earnings per share estimates to $2.18 from $2.04 for fiscal 2005 (ending August), and to $2.50 from $2.37 for fiscal 2006. However, we expect free cash flow to remain below fiscal 2004 levels. Our 12-month target price remains $53, based on a blend of our discounted-cash-flow and relative value models.


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