Markets & Finance

S&P Keeps Strong Buy on AstraZeneca


AstraZeneca (AZN): Reiterates 5 STARS (strong buy)

Analyst: D. Seemungal

The company posted third quarter earnings per ADS of 76 cents,

vs. 51 cents, before non-operating EPS of 17 cents, beating our estimate by six cents. Key sales drivers were Nexium gastrointestinal (+19%), Symbicort anti-asthma (+30%), Arimidex anticancer (+37%), and Seroquel anti-psychotic (+33%). We expect AZN to file for a new bipolar depression indication for Seroquel before yearend. We are raising our

2005 estimate by 10 cents, to $2.88, but reiterating our 12-month target price of $51, based on our discounted cash flow model and peer group multiple-based comparisons.

Verizon Communications (VZ) : Maintains 3 STARS (hold)

Analyst: Todd Rosenbluth

Following Verizon's third quarter conference call, we continue to see wireless growth driving near-term results. We see ongoing subscriber gains with the segment's broadband rollout nearly complete. On the wireline side, we believe DSL growth is helping offset access line losses. We believe Verizon will be able to manage capex growth with its power over suppliers. However, we are lowering our 2006 earnings per share estimate by 4 cents to $2.70 on expected narrower margins. Our projections exclude the impact of Verizon's pending merger with MCI (MCIP), which we expect to close by early 2006, pending needed approvals.

Encana (ECA) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Charles LaPorta

Encana reported third quarter operating earnings per share of 80 cents vs. 42 cents, below our $1.15 estimate on lower-than-expected volumes. Record rainfall in Alberta greatly reduced natural gas production during the quarter and caused Encana to lower 2005 and 2006 production expectations. In addition, legacy hedges from the Tom Brown Inc. acquisition reduced realized prices. We are lowering our 2005 and 2006 earnings per share estimates to $3.95 and $4.70, from $4.25 and $5.20, respectively. Our 12-month target price declines $15 to $52, based on an enterprise value of 5.2 times our estimated 2006 earnings before interest taxes depreciation and amortization, or EBITDA, a premium to peers.

Endurance Specialty (ENH) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Cathy Seifert

Endurance Specialty reported $6.27 third quarter operating loss vs. 36 cents operating earnings per share, wider than our $3.71 loss estimate amid $479 million in after-tax losses from Katrina and Rita. Although we continue to view these losses as outsized relative to Endurance Specialty's capital position, we also believe the company is fairly well positioned to leverage growth opportunities emerging in the wake of an upturn in premium rates we expect. Our 12-month target price rises by $4 to $34, assuming an expansion in the shares' forward price/book multiple to about 1.4 times 2005 estimated tangible book, a premium to some peers.

Questar (STR) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Yogeesh Wagle

Based on higher production and hedged prices, we are raising our 2005 and 2006 earnings per share estimates by 20 cents and 50 cents, to $3.50 and $4.40. We think the hurricane damage to Gulf energy infrastructure puts Questar's Rockies and mid-continent exploration & production assets in a strong position to gain from any tightness in winter gas supplies. With Questar shares 15% off their early October 52-week high, we believe they are undervalued on a p-e-to-growth basis. We are raising our target price to $87 from $70, on a 19.7 times forward p-e, and a premium to peers based on Questar's double-digit growth outlook.

Grant Prideco (GRP) : Ups to 4 STARS (buy) from 2 STARS (sell)

Analyst: Stewart Glickman

Grant Prideco posted third quarter earnings per share of 49 cents before a one-time charges of 12 cents, vs. 14 cents, 5 cents above our estimnate. Revenues rose 11% from the second quarter, and operating margins widened in all three segments. We think Grant Prideco should generate better pricing traction in 2006, and are lifting our 2006 earnings per share estimate to $2.46 from $1.89. Shares are trading at 9.7 times our estimate of 2006 earnings before interest taxes depreciation and amortization, or EBITDA, below peers' 9.9 times, and are in line with peers on price/cash flow, but our discounted cash flow model now indicates shares are undervalued. Blending valuations, we are raising our 12-month target price by $11 to $43.

Fossil (FOSL) : Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Jason Asaeda

An uncertain macroenvironment raises holiday sales concerns. Combined with expected sales loss next year from planned store closures by Federated Department Stores (FD), we think Fossil faces greater challenges in turning around its ailing Fossil and Relic fashion watch businesses. As a result, we are cutting our 2005 operating earnings per share estimate by 4 cents to $1.12, and 2006's by 20 cents to $1.40, with projected growth in Fossil's accessory and mass-market watch businesses providing some support. We are lowering our 12-month target price to $14 from $23 on our updated discounted cash flow valuation.

Sun Microsystems (SUNW): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Sun says CFO Steve McGowan will retire at the end of fiscal 2006 (June). We believe a CFO transition comes at a

critical point for Sun as it has attempted to broaden its customer and product base, and developed new approaches to its traditional business model. However, the right CFO could also bring better expense discipline and introduce new programs to materially improve the company's cost structure as well, which we view as a key opportunity. We continue to view Sun, which has some $7 billion in cash and investments and

trades near peers on a price/sales basis, as fairly valued.

Martha Stewart Living (SUNW): Reiterates 1 STARS (strong sell)

Analyst: Gary McDaniel

The company's third quarter loss per share of 50 cents, including 21 cents in expenses for Mark Burnett's warrants,

vs. a loss of 30 centsone year earlier, is 29 cents wider than our estimate. Publishing revenues rose 24%, below our 30% estimate, and total revenues grew 5.6%, falling short of our 7.4% forecast. MSO sees ad pages for flagship magazine doubling in Q4, above our 50% forecast, and revenue

of $80 million, 24% above our $64.3 million estimate, but sees EBITDA of $11 million, below our $13.5 million forecast. MSO says its sales are improving at Kmart, following the debut of Martha, but notes Q4 sales fell. We will update our report after the company's Oct. 27 confreence call.


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