Markets & Finance

S&P Ups AIG to Buy


American International Group(AIG) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Cathy Seifert

AIG announced that it expects to incur after-tax losses from Hurricane Katrina of approximately $1.1 billion, of which $900 million are insurance claims. We are lowering our third quarter earnings per share estimate of 43 cents to 82 cents to reflect this exposure, which we view as manageable, given AIG's capital base in excess of $85 billion. We believe the pricing power that will likely emerge as a result of Katrina's insured losses will provide AIG shares with a catalyst. We are raising our 12-month target price by $2 to $72, which implies a forward price/book multiple of 2 times our 2006 estimated tangible book value.

Biogen Idec (BIIB): Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Frank DiLorenzo, CFA

Biogen Idec will provide a safety update in the coming weeks on Tysabri in rheumatoid arthritis and Crohn's disease, as previously expected. It plans to submit a supplemental BLA for Tysabri to the Food and Drug Administration following safety review. While we had removed Tysabri from our models, we think a clean safety review and limited approval could provide some upside, though we still do not see strong commercial success. However, we are positive on Rituxan and on the company's restructuring. Assuming Biogen Idec trades to a 1.6 times p-e-to-growth, using our 2006 earnings per share estimate of $1.94, our 12-month target price rises $1 to $48.

Avon Products (AVP): Reiterates 3 STARS (hold)

Analyst: Howard Choe

On broad weakness across its geographies, Avon has lowered its 2005 earnings per share guidance to a rise in low-to-mid single digits, down from a prior $2.03 to $2.08 (15% to 18% rise). Though Avon attributes some of the weakness to Hurricane Katrina, we are more concerned about a slowdown in developing markets. We are lowering our 2005 earnings per share estimate to $1.88 from $2.04, 2006's to $1.88 from $2.09 and our 12-month target price to $29 from $34, about 15 times estimates. With Avon already at a 20% discount to peers and indicated down sharply this morning, we believe low earnings visibility is largely in the price.

Goodyear Tire (GT): Reiterates 3 STARS (hold)

Analyst: Efraim Levy, CFA

Goodyear announced that it has retained advisers to help it sell its engineered products business. Although the divestiture should reduce the company's annual revenues by about $1.5 billion and eliminate profit contributions, we believe the announcement fits Goodyear's strategy of selling non-core assets and reducing debt. Proceeds from a possible sale could help reduce some of the company's sizable debt obligations, in our view. We give credit to management for what we view as a significant performance improvement and for restructuring the company's balance sheet.

Christopher & Banks (CBK): Maintains 3 STARS (hold) Opinion

Analyst: Jason Asaeda

Christopher & Banks posted in-line August quarter earnings per share of 16 cents vs. 15 cents. Gross margins widened on inventory controls and a renewed focus on distinctive fashions. However, expenses deleveraged on a 3% same-store sales gain, due to the company's Acorn acquisition and above-plan payroll and medical expenses. We are reiterating our fiscal year 2006 (ending February) earnings per share estimate of 83 cents, but we have limited visibility due to soft early fall sales. September same-store sales are tracking flat despite an easy year-ago 7% decline comparison. We are lowering our 12-month target price by $2 to $16, based on updated discounted cash flow and p-e-growth metrics.

FuelCell Energy (FCEL): Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Royal Shepard

FuelCell has dropped below our 12-month target price of $11, as investor reaction to Katrina and the Energy Policy Act has begun, in our opinion, to settle down. We continue to look for break-even results in 2009, reflecting increased production volumes and about a 50% reduction projected in unit manufacturing costs. Persistently high prices for natural gas, a principal fuel for FuelCell's systems, could still push out commercial adoption. We are leaving our target price unchanged, based on relative peer and discounted cash flow valuations.

99 Cents Only Stores (NDN): Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Jason Asaeda

We are cutting our 2005 earnings per share estimate by 11 cents to 32 cents, as we see 99 Cents Only's low income customers tightening their spending over the next few quarters as a result of higher gasoline and utility prices. The company's inability to raise prices, as well as the intense competition from other extreme value retailers, add to our guarded outlook. We note ongoing delays in the company's 10-Q filings, and we think that is due to weak internal controls over its financial reporting. We are lowering our target price to $8.50 from $13 on updated p-e to growth and discounted cash flow valuations. We think 99 Cents Only is overvalued, given near-term challenges we see.


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