S&P; Stock Picks and Pans

S&P; Boosts Adobe, Medtronic to Buy

Plus: Analysts upgrade Bank of Hawaii and comment on Fannie Mae's recent settlement

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From Standard & Poor's Equity Research
Adobe Systems (ADBE) : Ups to 4 STARS (buy) from 3 STARS (hold)
Analyst: Scott Kessler

The shares have fallen some 28% since early February. On May 2, the company indicated that its May quarter results would come in at the low end of its earlier guidance range. We believe this reflects reasonable maturing of CS2 offerings and transitions to the new Mactel platform, as well as the Acrobat 8 release, which we expect in the November quarter. After a review of our valuation models, we are lowering our target price to $35 from $38. But, we view Adobe as a large-cap, high-quality technology stock with notable appreciation potential. Its S&P; Earnings & Dividend Rank is B+.



Medtronic (MDT) : Ups to 4 STARS (buy) from 3 STARS (hold)
Analyst: Robert Gold


April quarter operating EPS of 62 cents vs. 53 cents is a penny under our estimate. But, we were impressed with balanced growth across product categories and think Medtronic captured share in ICD and pacing. Medtronic sees the U.S. ICD market resuming high-teen growth, up from about 6% this quarter. For fiscal year 2007 (April), our sales forecast stays $12.6 billion, but our EPS estimate rises by 10 cents to $2.45 to reflect share buybacks and lower financing and stock option costs than originally envisioned. Our target price rises by $2 to $60.



Avaya (AV) : Cuts to 1 STAR (strong sell) from 2 STARS (sell)
Analyst: Ari Bensinger


We believe Avaya's operating environment is becoming more challenging, with lower demand for legacy TDM products and intensifying competition in the VoIP arena. In addition, we believe a potential work stoppage related to about 2,900 union employees (15% of workforce), who authorized a strike amid difficult renewal negotiations regarding a collective bargaining contract that expires 5/27, could hurt near-term operations. Our target price is $9, 19 times our fiscal year 2006 (ending Sep.) earnings per share (EPS) estimate of 48 cents, below peers, justified, we think, by sales growth that is well below peer average.



CNET Networks (CNET) : Cuts to 2 STARS (sell) from 3 STARS (hold)
Analyst: Scott Kessler


CNET recently received notice of an informal SEC inquiry into its stock-options grants. Earlier this week, CNET announced a special committee to investigate such grants. We now believe CNET will likely not be seen as a potential acquisition target until this matter is resolved, and we think this could take time. We thus are cutting our 12-month target price to $8 from $10. We also think these developments could require material related Selling General & Administrative expenses and serve as a management distraction.



Bank of Hawaii (BOH) : Ups to 4 STARS (buy) from 3 STARS (hold)
Analyst: Chris Muir


The shares have fallen 4.5% since March 31 compared to a 2.6% drop in the S&P; Regional Banks index. We see stable growth ahead, based on our belief that the Hawaiian economy will remain sound. For 2006, we look for continued growth in earning assets, an increase in the net interest margin, growth in noninterest income, and an improvement in the company's efficiency ratio, despite the inclusion of stock option expense. We are raising our 2006 and 2007 earnings per share (EPS) estimates by 2 cents each, to $3.68 and $4.06, and our 12-month target price remains $56.



Fannie Mae (FNM) : Maintains 3 STARS (hold)
Analyst: Frank Braden


Following yesterday's conference call on its settlement with the Office of Federal Housing Enterprise Oversight and the SEC, we believe Fannie Mae's management has proper guidance on correcting its internal controls and corporate culture. We are encouraged by new additions to management, but remain cautious pending new accounting filings and the present cloudy legislative environment. Near-term growth will be limited by restrictions on Fannie Mae's mortgage asset portfolio; the $400 million civil penalty will be paid from over $1.1 billion in excess capital. Our target price for Fannie Mae remains $60.

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