Markets & Finance

S&P Ups Analog Devices, Washington Post, Big Lots


Analog Devices (ADI) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Thomas Smith, CFA

The company posted October quarter earnings per share of 18 cents after 18 cents charges for restructuring and a one-time tax on repatriated earnings, vs. 34 cents earnings per share before charges; in line with our 36 cents estimate. Revenues fell 2% year over year and rose 7% quarter over quarter. The company's quarterly cash dividend grew to 12 cents from 10 cents. We are now including about 4 cents per quarter in stock option expense in our operating estimates, and we are adjusting downward our fiscal year 2006 (ending October) earnings per share estimate to $1.45 from $1.62. We see $1.75 in fiscal year 2007. Our 12-month target price rises to $48 from $43.

Abbott Labs (ABT) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Frank DiLorenzo, CFA

The company announced that Simdax (levosimendan) did not meet the primary endpoint of a 180-day mortality reduction in a 1,327-patient SURVIVE trial treating patients with acute decompensated heart failure. Abbott Labs also recently reported mixed results for Tricor in helping to reduce the risk of heart attack or death in patients with Type II diabetes. Current news follows the rejection of Xinlay for prostate cancer by the Food and Drug Administration panel. We are now neutral on the company's pipeline. We are lowering our target price by $4 to $49.

Washington Post (WPO): Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: James Peters, CFA

The company's shares are down about 26% this year, which we attribute in part to weak margin growth in the company's education division. However, we think significant investment in and a long term focus on education, which is the Washington Post's largest and fastest-growing revenue segment, will eventually pay off with expanding margins. With shares trading below our 12-month target price, which remains $750, we are upgrading our opinion on the Washington Post based on valuation.

Big Lots (BLI): Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Jason Asaeda

October quarter loss per share of 17 cents vs. 22 cents loss is 10 cents narrower than our estimate. Big Lots has reduced its expense structure through an 8% cut in its home office workforce, productivity gains at distribution centers, and well-managed store payrolls. While we think clearance markdowns will hurt January quarter results, and we think they, the expense cuts, the closure of underperforming stores, and planned mix changes will improve inventory turns and cash flow. We are lifting our fiscal year 2006 (ending January) earnings per share estimate by 10 cents to 23 cents, and fiscal year 2007's by 5 cents to 41 cents. Our 12-month target price rises $3 to $13.

Genworth Financial (GNW): Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Frank Braden

We see favorable sales trends in higher-margin products, and as a result of General Electric's (GE) reduced ownership in Genworth Financial, we expect increased capital flexibility. We see strong growth in higher return on equity businesses, including international mortgage insurance, European payment protection insurance and traditional life. We think the reduction of GE ownership to 27% and about $1.4 billion of deployable capital capacity will allow for possible acquisitions or share buybacks. Our target price rises by $3 to $37, or 13.3 times our 2006 operating earnings per share estimate of $2.77, a premium to the peer-group average.

ICOS (ICOS): Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Frank DiLorenzo, CFA

While we expect ICOS to turn profitable in 2006, we are increasingly concerned about the growth rate of the U.S. erectile dysfunction market and prescription growth of Cialis (from ICOS' joint venture). For October, new script share for Cialis was down slightly to 26% from 26.5% in September, based on data from IMS Health. We are maintaining our 2005 loss per share estimate of $1.28 for ICOS, and expect 2006 earnings per share of 35 cents. We continue to have a 12-month target price of $33. However, we are less confident of our 2006 earnings per share view amid Cialis market weakness.

Arrow Electronics (ARW): Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Dylan Cathers

Our downgrade is due to valuation. The company's shares have increased over 25% year-to-date, approaching our 12-month target price of $34. We see revenues rising at a low-to-mid single-digit pace in 2005 and 2006. We are lowering our 2005 earnings per share estimate by a penny to $2.02, and are raising our 2006 estimate to $2.40 from $2.24, based on a gradually widening operating margin.


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