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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.

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Redback Networks (RBAK) announced Wednesday that it has won the second phase of a network upgrade contract with Guangdong Telecom, the largest provincial carrier of China Telecom (CHA). 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

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