Markets & Finance

S&P Boosts Forest Labs to Buy


Plus: Analyst opinions on General Electric, LG.Philips LCD, and more

From Standard & Poor's Equity ResearchForest Laboratories (FRX)

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

Analyst: Herman Saftlas

Forest posts what we view as another great quarter, with December-quarter EPS rising 37% to 78 cents, 8 cents above our forecast. The growth was largely driven by solid sales of Lexapro (+13.5%) and Namenda (+40%). And income from Benicar climbed 37%. Forest raises guidance for fiscal 2007 (ending March) EPS to $2.79-$2.84 from $2.60-$2.65. We think novel hospital antibiotics now in Phase III, from recently acquired Cerexa, and other pipeline products should be able to replace Lexapro and Namenda, which go off patent in March, 2012. We are raising our 12-month target by $8, to $61, on revised p-e and discounted cash-flow analyses.

General Electric (GE)

Reiterates 4 STARS (buy)

Analyst: Richard Tortoriello

GE agrees to acquire Smiths Aerospace, a UK supplier of aircraft systems and engine components, for $4.8 billion, or 2 times sales. The deal puts GE in the aircraft systems market in competition with Rockwell Collins (COL) and Honeywell (HON). We believe the price is on the high side, but we see substantial room for a rise in both revenues per employee and profit margins at the unit. In sum, we view the deal positively, as we believe the GE brand name will enhance the value of Smiths' products and we expect the current strong aerospace cycle to continue until at least 2009.

LG.Philips LCD (LPL)

Maintains 2 STARS (sell) on American Depositary Receipts

Analyst: Kenneth Leon, CPA

The company's fourth quarter per share loss of $1.06, vs. $2.20 EPS one year earlier, is narrower than our $1.47 loss estimate. Sales in local currency rose 10.5% from the third quarter, the result of higher shipments and stable pricing for flat panel TVs, notebooks, and PC monitors. We believe a higher sales mix of notebooks led to positive revenue growth. While LG.Philips may improve its operating costs, we estimate average selling pricing will decline 19% in 2007. We are narrowing our 2007 loss per share estimate to 76 cents from $1.00 and see a 90-cent profit in 2008, but we are keeping our target price of $13, a near-peers 14 times our 2008 EPS estimate.

First Republic Bank (FRC)

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

Analyst: Stuart Plesser

We expect First Republic Bank's net interest margin to come under continued pressure in the fourth quarter based on an inverted yield curve coupled with competition for deposits. In addition, we expect credit quality, which was pristine for the first three quarters of 2006, to deteriorate in the fourth quarter. Our 2006 and 2007 EPS estimates remain $2.12 and $2.28, respectively. However, we are lowering our 12-month target price $3 to $37, to reflect a difficult banking environment.

Taiwan Semiconductor (TSM)

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

Analyst: R.Lin, C.Montevirgen

Our upgrade reflects our expectations for a recovery in the Asian foundry sector following an anticipated inventory correction. We also think that higher valuation multiples are warranted by positive corporate developments arising from changes in government policy, allowing TSM to expand production of more technologically advanced processes in China. We are raising our 12-month target price by $2, to $12.

Ablemarle (ALB)

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

Analyst: R. O'Reilly-CFA

Ahead of earnings, expected to be released 1/24, we expect refining catalysts to ease following implementation of new diesel sulfur regulations in Oct., and we see polymer additives reflecting a decline in plastics industry sales. We are raising our 2006 and 2007 operating EPS esimates to $3.75 and $4.25, respectively, from $3.15 and $3.50. Based on our improved outlook, we are raising our 12-month target prices to $70 from $58, in line with peers. Above this level, we would sell.


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