Markets & Finance

S&P Cuts Boston Scientific to Strong Sell


From Standard & Poor's Equity ResearchBoston Scientific (BSX)

Downgrades to 1 STARS (strong sell) from 2 STARS (sell)

Analyst: Robert Gold

Heading into the third quarter earnings

release, expected after the close of trading Oct. 18, we are concerned that Boston Scientific again lost share to competitors in

the global implantable cardioverter defibrillator markets, a category which itself has entered a period of contraction. In addition, we believe the company likely lost share in the interventional cardiology

space. As such, and given Boston Scientific's highly leveraged balance sheet, we believe the outlook for substantial operating improvement continues to deteriorate absent sizeable cost cuts. We still see 2006 EPS of 85 cents,

and 95 cents in 2007. Our 12-month target price stays $13.

Novartis (NVS)

Reiterates 5 STARS (strong buy)

Analyst: D. Seemungal

Novartis is scheduled to report third quarter results on Oct. 19. Augmented by the acquisition of Chiron, we see sales rising 13% to $9.5 billion, and EPS growth of 14% to 81 cents. We think key drivers in the quarter should be Diovan heart drug and Gleevec oncology agent. The company will also likely update investors on the status of new drugs, such as Galvus for diabetes and Rasilez antihypertensive. We also expect its upcoming Nov. 28 R&D pipeline meeting to be another positive trigger. Our 12-month target price remains $65, which applies a peer level p-e of 17 times to our $3.80 estimate for 2007.

St. Jude Medical (STJ)

Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Robert Gold

St. Jude's third quarter operating EPS of 32 cents, vs. 44 cents one year earlier, misses our 39 cents estimate on a continued slowdown in the implantable cardioverter defibrillator market and an associated adverse impact on gross margin. We think visibility on a recovery in the ICD category remains low through mid-2007. Including option costs and charges related to restructuring, our 2006 operating EPS estimate falls by 10 cents to $1.43, and 2007's falls by 15 cents to $1.70. Our target price falls by $7 to $38, based on a peer average p-e-to-growth ratio of 1.5 times applied to our assumed 15% long-term EPS growth rate and 2007 EPS estimate.

Restoration Hardware (RSTO)

Downgrades to 2 STARS (sell) from 3 STARS (hold)

Analyst: Michael Souers

The shares have risen about 50% over the past two months, and now trade well above our discounted cash-flow-based 12-month target price of $7.50. While we were encouraged by unexpected July-quarter strength in sales, we believe Restoration Hardware's turnaround efforts will face some problems amid intense competitive pressure from retailers, as well as from what we view as a likely slowdown in consumer spending. We expect the company to report a loss of 15 cents when it announces October-quarter results in late November. Priced now at 28.4 times our fiscal 2008 (ending January) EPS estimate of 32 cents, we see an adverse risk/reward ratio for owning the shares.


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