Markets & Finance

S&P Downgrades J&J, J.C. Penney


Plus: Analyst opinions on Priceline.com and UBS

From Standard & Poor's Equity ResearchJohnson & Johnson (JNJ)

Downgrades To 4 STARS (buy) from 5 STARS (strong buy)

Analyst: Robert Gold

J&J says it discovered potentially improper payments related to sales of medical devices in two countries outside the U.S., and notes the head of its device/diagnostics unit has resigned. The company is cooperating with Justice Dept. and SEC reviews, and we think it can manage the situation. But we reduce our 2007 EPS estimate by 8 cents to $3.92 on expected weakness in coronary stents and some drug categories, dilutive impact of acquisitions and gross margin pressures. We keep our target price at $74, based on p-e to earnings growth ratio inline with peers, our discounted cash-flow model and sum-of-the-parts analysis.

J.C. Penney (JCP)

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

Analyst: Jason Asaeda

We think the company's weak January-quarter

same-store sales relative to peers reflected a lack of differentiated merchandise. In our view, the lack of a strong brand line-up has forced the company to rely on heavy discounting to compete in the marketplace, a no-win strategy. We believe new American Living brand being developed by Polo Ralph Lauren (RL) is promising. But

with it not launching until fiscal 2009 (ending January), we are cutting our fiscal 2008 EPS estimate by 15 cents to $5.55 and our DCF-based 12-month target price by $8 to $77 on lowered near-term forward sales and margin growth assumptions.

Priceline.com (PCLN)

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

Analyst: Scott Kessler

Update: Priceline shares are up more than 10%, following fourth quarter results and 2007 guidance that notably exceeded our forecasts. After further review, we believe the company is being conservative with its 2007 outlook, and are raising our 2007 EPS estimate to $2.35 from $2.30. Based on our increased estimates, higher peer valuations, and revised DCF analysis, we are also raising our 12-month target price to $54 from $50. However, we now see Priceline as fully valued. Potential risks we see include a slowing economy, greater competition, and continuing investment in, and expansion of, the Booking.com business.

UBS (UBS)

Maintains 3 STARS (hold)

Analyst: D. Chambers

UBS reports fourth quarter net income of 3,407 million Swiss francs, well above our estimate of 2,670 million francs, as discontinued operations contributed CHF 262 million to the results. Swiss retail banking, Swiss and international private banking, and U.S. wealth management all delivered profits in line with our expectations. However, the investment banking divisional cost base was CHF 1.0 billion higher than our expectations, and investment banking profit margins are likely to remain a significant concern to us in 2007.

IndyMac Bancorp (NDE)

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

Analyst: Stuart Plesser

Shares have declined 20% in 2007, we think a reflection of the combination of credit deterioration and margin pressure. With the shares now trading at 8.7 times our 2007 earnings per share (EPS) estimate, in line with the 3-year average, we believe they are fairly valued. Although IndyMac Bancorp only originates a small percentage of subprime loans, risky low-document loans still make up the bulk of its production. As a result, credit issues remain a concern. We are increasing our 12-month target price by $2 to $37, 8.8 times our 2007 EPS estimate of $4.22, still below the 5-year trailing historical average amid tough industry conditions.

Kimco Realty (KIM)

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

Analyst: Robert McMillan

Fourth quarter per share funds from operations of $0.58 vs. $0.55 tops our $0.57 estimate on a 19% revenue rise. Occupancy rose to 95.8% at fourth quarter-end from 95.1% last year, while rents on new leases jumped 20% and 9.8% for renewals. We look for continuing robust conditions for Kimco Realty's tenant retailers, contributions from the large Pan Pacific Properties acquisition, and ongoing international expansion efforts to translate into solid growth. We are keeping our 2007 FFO estimate of $2.46, see 2008's at $2.72, and we raise our 12-month target price $4 to $56, on revised price-to-FFO and peer analysis.

Advanced Medical Optics (EYE)

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

Analyst: Robert Gold

Fourth quarter per-share loss of $0.13 vs. EPS of $0.03 is far below our $0.06 EPS estimate on higher than expected costs related to eye care product recalls. Excluding a planned IntraLase (ILSE) acquisition and pending approvals, we still see 2007 sales of $1.05 billion. But we are lowering our 2007 EPS estimate of $0.15 to $1.80 on margin pressures. We see the IntraLase deal significantly dilutive to 2007 EPS, leveraging the balance sheet and creating integration risks. We are cutting our 12-month target price by $5 to $33 on a P/E-to-growth discount to peers we see justified by financial and operating risks.


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