Markets & Finance

S&P Cuts Lilly to Hold


From Standard & Poor's Equity ResearchEli Lilly (LLY)

Downgrades to 3 STARS (hold) from 5 STARS (strong buy)

Analyst: Herman Saftlas

Third quarter adjusted EPS rose 9.5% to 80 cents, a penny ahead of our estimate. However, we attribute most of the rise to higher pricing, a one-time boost from shifting Zyprexa patients to Medicare, and cost economies. We are also concerned about Lilly's wide fourth quarter EPS guidance of 77-87 cents, as well as rising competition in key franchises. On the plus side, we still see promise in Lilly's pipeline, as well as long-terms benefits from the planned ICOS acquisition. We are reducing our 12-month target price by $3 to $62, which applies a peer-level p-e of about 18.2 times to our $3.40 estimate for 2007.

Juniper Networks (JNPR)

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

Analyst: Ari Bensinger

Juniper delays posting full GAAP third quarter financial results due to issues related to stock option backdating. On a preliminary basis, third quarter EPS, before stock options, was 18 cents, a penny below our estimate, on 5% sales growth. We are disappointed in Juniper's routing sales growth, which has been sluggish over the past three quarters, despite positive industry fundamentals as carriers migrate toward next generation IP networks. We are raising our 12-month target price by $1 to $16, 22 times our 2007 EPS estimate of 73 cents, in line with peers. But, trading above that target, we view Juniper as overvalued.

Bank of America (BAC)

Reiterates 5 STARS (strong buy)

Analyst: Mark Hebeka, CFA

BofA posted third-quarter EPS of $1.18, vs. 95 cents one year earlier, above our $1.12 estimate, mainly due to lower-than-expected credit costs and expenses. We are particularly encouraged by strong growth in checking accounts and solid banking fundamentals, but note intense competition in most markets and a challenging interest rate environment. Still, we see BofA as a strong long-term performer and view product and geographic diversity as key strengths. We are raising our 2006 and 2007 EPS estimates to $4.60 and $4.88 from $4.52 and $4.82. Our target price rises to $63 from $60, 12.9 times our 2007 estimate, in line with peers.

Johnson Controls (JCI)

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

Analyst: Efraim Levy, CFA

Our downgrade is based on valuation. We expect Johnson Controls to report September quarter earnings per share (EPS) of $1.90 on October 25. We are maintaining our fiscal year 2006 (Sep) EPS estimate of $5.30. But we are lowering our 2007 EPS estimate by a nickel to $6.13, as we expect December quarter weakness in automotive. However, we are raising our 12-month target price by $6 to $86. We think a greater valuation is justified given the rising proportion of less cyclical, non-automotive business. With the shares near our target price, we would not add to positions.

Computer Hardware Sub Industry (DELL)

Reiterates Neutral

Analyst: Richard Stice, CFA

Research firm IDC releases its latest update on the PC market, which grew 7.9% in the third quarter. Growth in the U.S. was restricted by the transition to notebook PC's. Of the top five worldwide vendors, Dell experienced the slowest rate of growth, and as a result was supplanted for the top spot by Hewlett-Packard (HPQ). In the U.S. market, we note that Apple Computer (AAPL) easily outdistanced its larger rivals, with a gain of 32%. We expect growth in the fourth quarter to be aided by the launch of Vista by Microsoft (MSFT), as well as favorable seasonal trends.

UnitedHealth Group (UNH)

Ups to 5 STARS (strong buy) from 4 STARS (buy)

Analyst: Phillip Seligman

Third quarter operating EPS of $0.74 vs. $0.58, before reserve development, is $0.01 below our estimate. We are encouraged by cost controls and 5% member rise. We project 2007 revenue up 10%, supported by premium yields above 7%-8% medical cost growth, by continued strong growth in Medicare and Medicaid businesses, by 3%-5% more self-funded commercial members, but with a more modest rise in risk-based enrollment amid competition. Our 2007 estimate of $3.42 moves up $0.02 today, raising our 12-month target price $2 to $60.


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