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Stock Analyst Update

A Top Telecom Pick Scores a Big Win

Plus, Pfizer stubs a toe, DeVry draws undergrads, and more.

Redback Networks  announced Wednesday that it has won the second phase of a network upgrade contract with Guangdong Telecom, the largest provincial carrier of China Telecom . Guangdong Telecom will deploy Redback's SmartEdge router on as many as 4 million of its 50 million customer lines. While the terms of the contract were not announced, Morningstar analyst John Slack notes that this is a major international win for Redback and is consistent with his thesis that the company is concentrating on expanding its international business. Despite Slack's  concerns about quarter-to-quarter sales lumpiness and growing competitive threats, he continues to believe Redback is well positioned in one of the sweet spots of telecom spending. Given the early state of network upgrades among its customers, Slack believes Redback will continue to see strong sales growth as carriers build out their networks over the next couple of years. He's leaving his fair value estimate unchanged.
 Full Analyst Report: Redback Networks

Sticking with Pfizer's Fair Value Despite R&D Setback
Pfizer's (PFE) decision to discontinue development of torcetrapib deals another blow to a firm already struggling to replace sales it has lost--and will lose--as a result of patent expirations. However, Morningstar analyst Heather Brilliant views the firm as more than just a compilation of drugs; she thinks Pfizer has built sustainable competitive advantages that will help it remain a pharmaceutical leader. Moreover, when Brilliant removed torcetrapib from her model, it knocked only about $1 off her fair value estimate. In essence, Brilliant thought torcetrapib had the potential to bring in $10 billion in peak sales for Pfizer, but not until 2014. Further, because the drug was still in Phase III, she had assumed a 60% probability it would eventually receive Food and Drug Administration (FDA) approval. Thus, even after taking into account the failure of torcetrapib, she's standing firm on her fair value estimate. 
 Full Analyst Report: Pfizer

Solid New Enrollments for DeVry
DeVry (DV) reported solid new undergraduate fall enrollments Thursday. New enrollments grew 11.9%, roughly in line with Morningstar analyst Kristen Rowland's estimate. In addition, DeVry's total undergraduate enrollments rose 4.9%, the first increase in fall enrollment in several years. Solid new undergraduate start growth, which has been very encouraging over the past year, underpins Rowland's thesis and should continue to drive improvement in DeVry's profitability. Since these results align with Rowland's long-term view of the company, she is maintaining her fair value estimate.
 Full Analyst Report: DeVry

FDA Panel Could Hurt Boston Scientific and Angiotech Pharmaceuticals
Amid mounting concerns about potentially fatal longer-term side effects from drug-eluting stents, Boston Scientific (BSX), Angiotech Pharmaceuticals , and to a lesser extent Johnson & Johnson (JNJ) have remained under a dark cloud. The FDA has convened an expert panel to assess data suggesting that such stents can lead to life-threatening blood clots in a very small minority of patients even several years after the stent is implanted. However, Morningstar analyst Debbie Wang notes that this data is still emerging. For instance, it's not clear which patients might be more vulnerable to the development of blood clots. Further, the small but serious risk of blood clots must be weighed against the complication of reclogged arteries that require further intervention, which is the primary shortcoming of bare metal stents. All told, Wang doesn't think the panel is likely to issue any clear-cut guidelines substantially limiting the use of drug-eluting stents. Instead, she expects it to recommend further study of what sort of patients should avoid such stents and the optimal drug therapy that should be used in conjunction with these devices. For that reason, she's holding steady on her fair value estimates for all three companies.
 Full Analyst Report: Angiotech Pharmaceuticals
 Full Analyst Report: Boston Scientific
 Full Analyst Report: Johnson & Johnson

Roundup of This Week's Feature Commentary
After two decades of fighting to stay in the black, the stars aligned in 2004, and refiners like Valero Energy (VLO), Frontier Oil , Sunoco , and Tesoro  have been enjoying outsized profits ever since. With mandatory environmental upgrades and hurricane repairs pretty much in the past, and cash flooding in, refiners are setting their sights on boosting capacity, improving reliability, and increasing the complexity of their refineries. In Morningstar analyst Justin Perucki's opinion, this increased investment will likely be the proverbial rain on the parade, driving refining margins back to more reasonable levels. In this piece, Perucki provides a refresher on refining margins, explains the upward trend in refiner capacity, describes the interplay between refining complexity and refiner competitiveness, and, finally, offers an outlook for the refining industry.
Recent Developments in the Refining Industry

FoxHollow Technologies  looks like a diamond in the rough to Morningstar analyst Julie Stralow. Though the company is a small-cap stock, lacks an economic moat, and courts a fair amount of risk given its reliance on a single product, Stralow estimates that the stock is worth $45 per share, which is nearly double the level that it has traded at recently. The following piece provides excerpts from Stralow's report, which fleshes out the case for this compelling value.
A Five-Star Small-Cap Stock

Morningstar GrowthInvestor editor Toan Tran recently received an e-mail asking for his thoughts on Growth Portfolio holding Maxim Integrated Products  and how best to play the semiconductor cycle. The semiconductor industry is cyclical, with alternating periods of growth and contraction. While many value investors have traditionally avoided technology, Tran thinks the semiconductor industry is fertile ground from which to harvest profits. The stocks often overshoot intrinsic value on both the downside and upside based on short-term sentiments, and mispricings tend to be corrected fairly quickly when the cycle turns. For those interested in exploiting these discrepancies, Tran offer his playbook to profit from the semiconductor cycle in the following piece.
How to Navigate the Semiconductor Cycle

When it comes to Internet search, Google (GOOG) is the runaway leader. However, we expect powerful content owners and other competitors will lead the next phase of growth in sales of online advertising. In this video report, Morningstar analysts Matthew Reilly and Rick Summer break down the company's growth prospects and the overall value proposition that the firm's stock offers.
Video Report: Google

Despite near-term pressures, we're confident about Applebee's  prospects over the long run. The company is benefiting from economies of scale, an alliance with Weight Watchers (WTW), and stronger carryout sales. As Morningstar director of stock analysis Pat Dorsey explains further in the following video report, we think the chain has plenty of room for growth.
Video Report: Applebee's

Increasingly stringent air quality standards and more acute concerns about slag formation have unlocked a huge market opportunity for Fuel Tech's (FTEK) emission control and process optimization technologies. We think the company's suite of products and management's deep-rooted ties to the utilities industry will translate into substantial growth for this narrow-moat firm. Morningstar director of stock analysis Pat Dorsey gives a quick-and-dirty synopsis of the case for the company in the following video report.
Video Report: Fuel Tech

This Week's 10 Most Popular Stock Analyses
 Whole Foods Market 
 Pfizer (PFE)
 FoxHollow Technologies 
 Anheuser-Busch Companies 
 Amgen (AMGN)
 Alcatel Lucent ADR 
 First Horizon National (FHN)
 First American (FAF) 
 Suncom Wireless Holdings (TPC)
 Doral Financial 

Jeffrey Ptak has a position in the following securities mentioned above: JNJ, WW. Find out about Morningstar’s editorial policies.