Markets & Finance

S&P Downgrades Applied Materials, Ups Citrix Systems


From Standard & Poor's Equity Research

Applied Materials (AMAT) : Cuts to 4 STARS (buy) from 5 STARS (strong buy)

Analyst: David Kaplan

Following quarterly results and comments from many leading semiconductor and semiconductor equipment makers, we see the start of a downturn in equipment spending as increasingly likely. We expect both unit volumes and ASPs to decline in the second half of calendar 2006, and into the beginning of 2007, although we believe this downturn will likely be less severe than past downturns, assuming continued growth in the global economy. Still, we are reducing our 12-month target price by $7 to $19 on these factors and lower peer valuations. Applied Materials will report Jul-Q results on August 15.

Citrix Systems (CTXS) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Scott Kessler

The shares have fallen more than 30% since early May, which in our view has been excessive. We believe Citrix Systems is one of the most appealing fundamental stories within our large-cap software coverage. We foresee revenue growth of 23% in 2006 and 17% in 2007, accompanied by improving operating and net margins. The shares declined after second quarter results and forward guidance were only in line with estimates. Our 12-month target remains $37, and we believe Citrix Systems's S&P Quality Ranking of B+, and S&P Qualitative Risk Assessment of Medium have appeal given economic and market uncertainties.

Readers Digest (RDA) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: James Peters, CFA

Before one-time items, Readers Digest posts June quarter earnings per share (EPS) of 20 cents vs. 19 cents, missing our estimate by 8 cents. The shortfall resulted from 8 cents of charges taken to improve the consumer segment, including an inventory charge for a discontinued business line and a charge to reduce future purchase obligations. We are encouraged by progress in the international and North American segments, but see consumer segment weakness weighing on near-term results. We are trimming our fiscal year 2007 (ending June) EPS estimate to 93 cents from $1.01, and lowering our 12-month target price $2 to $16.

First Energy (FE) : Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Justin McCann

Following a recent rise in the share price, we expect a lower level of total return. Second quarter operating earnings per share (EPS) of 95 cents vs. 71 cents is 4 cents above our estimate. The increase largely reflects a 20 cents reduction in amortization of transition costs. We are raising our 2006 EPS estimate by 5 cents to $3.72, and 2007's by 2 cents to $4.00. We expect future annual increases in First Energy's dividend, which now yields a below-peer 3.1%, of some 4% to 5% with a payout ratio targeted at around 55% of earnings. Our 12-month target price remains at $61.

Cigna (CI) : Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Phillip Seligman

Second quarter operating EPS of $2.17 vs. $1.72, before reserve development, is 22 cents above our estimate. We calculate that share buybacks accounted for 23 cents of EPS growth. Still, we are encouraged by the health care unit's earnings rise, enrollment retention, market expansion opportunities, and progress in the national accounts market for the 2007 selling season despite competition. We view positively pricing discipline and medical and Selling General & Administrative cost control. We are raising our 2006 EPS estimate by 25 cents to $8.75 and our target price by $19 to $121.

New Medicare Medical Device Reimbursement Rules (JNJ): Positive View

Analyst: Robert Gold

Medicare released new rules governing reimbursements to hospitals for certain medical devices, under which no device category will experience a cut in excess of 5.4%. We think the decisions were particularly beneficial to makers of implantable cardioverter defibrillators and cardiac stents, where original proposals included cuts of up to 24% and 28%, respectively. We are keeping our strong buy opinion on Johnson & Johnson; buy opinions on St. Jude Medical (STJ), Abbott Labs (ABT) and Medtronic (MDT); and a hold opinion on Boston Scientific (BSX).


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