Markets & Finance

S&P Cuts Harley-Davidson to Sell


From Standard & Poor's Equity Research

Harley-Davidson (HOG) : Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Thomas Graves, CFA

We continue to like Harley's strong brand

and market leadership. Also, we expect more dividend hikes and stock repurchases as the company utilizes free cash flow. However, in our view, based on our EPS estimates for 2006 and 2007, the stock is now at ample

p-e premiums of 10% and 12% to the S&P 500, respectively. Also, we have some concern that an aging U.S. population will limit longer-term

domestic motorcycle sales. Based on our discounted cash-flow model, we are keeping our 12-month target price at $62.

Cabot (CBT) : Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: John F. Hingher, CFA

Our downgrade mostly reflects valuation, after an 18% rise in the share price since 8/8/06, against a 5% rise by the S&P 500. Also, Cabot announces cost-cut initiatives that could result in a charge of $15 million through the end of fiscal year 2007 (ending Sep.), including about $8 million in fourth quarter fiscal year 2006. Before these charges, our fiscal year 2006 and fiscal year 2007 earnings per share (EPS) estimates remain at $1.50 and $1.75. Cabot is priced now at 23 times our forward 12-month EPS estimate of $1.60, above peer-average 12 times and its own historical average 17 times. Our model suggests value of $35. Blending valuations, our 12-month target price remains $33.

Pentair (PNR) : Cuts to 2 STARS (sell) from 3 STARS (hold)

Analyst: Stewart Scharf

The shares are off 7% this morning after Pentair cuts second half guidance, citing soft pool equipment market. The company also streamlines its management structure. We see inventory draw-downs impacting results for at least the rest of 2006, but think demand for technical and other water products should remain stable. We are reducing our 2006 EPS estimate by $0.20 to $1.80, before $0.06 net special charge, and 2007's by $0.30 to $1.95. Pentair shares are above peers, priced at 14.5 times our 2006 estimate. Our 12-month target price drops $8 to $23.

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

Analyst: Scott Kessler

We are increasing our 12-month target price to $38 from $37. Citrix Systems trades at significant premiums to the S&P 500 Software Industry. However, the shares have jumped some 33% since a recent low set on August 10. Our downgrade is largely based on risk-reward considerations. We believe that even though company fundamentals and financials remain solid, the stock is now fully valued. Citrix Systems is scheduled to report third quarter results after the markets close on October 18.

BJ's Wholesale Club (BJ) : Cuts to 1 STAR (strong sell) from 3 STARS (hold)

Analyst: Joseph Agnese

Our downgrade is based on valuation, since the shares are trading above our 12-month target price of $27. We believe sales will continue to be limited by weak traffic trends despite BJ's efforts to improve merchandise offerings. We believe the company's plan to improve traffic trends in the second half of fiscal year 2007 (ending Jan.) by offering gasoline prices below competitors will be hurt by a significant industry-wide reduction in retail gasoline prices. As a result, we are lowering our fiscal year 2007 EPS estimate $0.02 to $1.71.

Millennium Pharmaceuticals (MLNM) : Reiterates 3 STARS (hold)

Analyst: Paul Starsia

Company agrees to acquire AnorMed (ANOR) at $12 per share in cash, totalling about $515 million, pending approvals. The offer represents a 21% premium to AnorMed's close last night and a 40% premium to the recent $8.55 hostile bid from Genzyme (GENZ). AnorMed's MOZOBIL increases stem cell production prior to transplant into patients with hematological cancers, and appears complementary to Millennium Pharmaceuticals's Velcade, which is approved as second-line treatment for multiple myeloma. However, we see little immediate financial impact on Millennium Pharmaceuticals, and our target price remains $11.


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