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Get Four
|  | DECEMBER 29, 2003
 S&P POWERPICKS PORTFOLIO Who's Who in PowerPicks 2004 Here's the skinny on each member of S&P's picks for the best of the best -- and why they were chosen By sector, here are the 40 members of Standard & Poor's PowerPicks 2004 portfolio -- the collective "best ideas" of S&P's equity research staff (See BW Online, 12/29/03, "S&P Selects the Best of the Best") -- and a brief investment rationale from S&P for each: Consumer Discretionary Comcast (CMCSA ): We see numerous catalysts for profit improvement and superior share-price appreciation during 2004, including economies from the AT&T cable system integration, continued rollout of advanced digital services, favorable programming rates, and a nearly completed infrastructure upgrade. We anticipate that Comcast will begin generating significant levels of free cash flow during 2004. Fortune Brands (FO ): S&P views Fortune's golf, office-supply, home, and spirits divisions as well positioned to gain from an improving domestic economy in 2004. In our view, the home division should continue to benefit from home-building and home-remodeling market growth. In addition, Fortune has a history of making accretive acquisitions, and we believe this pattern is likely to persist in 2004. Gannett (GCI ): In our view, the shares of this leading newspaper publisher are priced at a steep discount to its peer group on a forward price-to-earnings basis. We believe the p-e discount is unwarranted and anticipate that the gap will narrow during 2004. In addition, the shares are priced well below our discounted free-cash-flow-based calculation of intrinsic value. La Quinta (LQI ): Our bullish 2004 investment outlook for the lodging REIT sector largely reflects improving domestic economic growth rate assumptions and an associated recovery in the lodging industry. We believe La Quinta is well positioned to generate sales and earnings above its peer group average in 2004. We see breakeven results by mid-2004, and expect that profitable results forecasted for 2005 will allow for acquisitions and the resumption of common dividend payments. Omnicom (OMC ): S&P believes that advertising stocks should rank among the better-performing in 2004. Omnicom stands among our top selections, aided by superior projected revenue and earnings growth. We believe Omnicom can generate compound average annual EPS gains of 22% through 2006. The shares appear attractively valued to us on both a relative p-e and discounted free cash flow basis. Quicksilver (ZQK ): This rapidly growing apparel company is penetrating independent and department-store channels via new product introductions and line extensions in the U.S. We believe international growth opportunities are robust, particularly in China. The stock trades at a discount to the S&P SmallCap 600 Index on a forward p-e basis. Viacom Class B (VIA.B ): We believe Viacom is well positioned to benefit from S&P expectations for a cyclical advertising upturn heading into 2004, as suggested by recent macroeconomic trends. Relative to peers, we feel a premium valuation on the stock is warranted by the company's high quality of earnings, strong balance sheet, and free cash flow generation prospects. Consumer Staples Constellation Brands (STZ ): Including the acquisition of BRL Hardy Ltd., we see fiscal 2004 (Feb.) sales growth of 26%, and believe that longer-term fundamentals are supported by product line and geographic diversification. We project Constellation generating five-year average operating earnings growth of 13%, vs. 7% for its peers, and look for the stock's relative p-e valuation discount to narrow considerably during 2004. PepsiCo (PEP ): Based on our expectation for strong sales of new products, widening operating margins, rising levels of free cash flow, and sizable common share repurchases, we believe Pepsi is poised to generate double-digit earnings growth in 2004. In addition, we believe a significant increase in the dividend is likely in 2004, given Pepsi's high level of free cash flow, which we believe will exceed $3 billion in 2003 and $3.5 billion in 2004. Sysco (SYY ): We expect that fiscal 2004 (June) earnings for this dominant participant in the large and fragmented U.S. food-service-distribution industry to benefit from acquisition synergies, food cost inflation, and continued growth in sales to the restaurant industry. In our view, Sysco's track record of strong, consistent earnings growth justifies the stock's premium valuation relative to the S&P 500 and its food distributor peer group. Energy ENSCO International (ESV ): We believe the shares will benefit from increasing day rates in the Gulf of Mexico resulting from tightening supply and a slight increase in demand for jack-up rigs in the Gulf. Within the offshore-drilling segment, our favorite selection is ENSCO, reflecting our projected 50% earnings increase for 2004. Evergreen Resources (EVG ): S&P anticipates that domestic economic growth and relatively high prices for imported petroleum products in 2004 should provide a healthy fundamental backdrop for this low-cost, coal-bed methane gas producer from its properties in the Lower 48 states. We believe the stock is significantly underpriced on a number of valuation metrics, including discounted free cash flow, relative price-to-earnings growth (PEG), and sum-of-the-parts. Exxon Mobil (XOM ): As the word's largest publicly traded oil company, we expect Exxon Mobil to benefit from strong oil and gas demand stemming from improving economic growth, which should allow for increased free cash flow levels. It has an expansive backlog of exploration and production development projects under way worldwide, and it should also benefit from strong refining industry trends. An active common share buyback program helps support EPS targets, and the stock provides a dividend yield above the S&P 500 average. Financials Bear Stearns (BSC ): We believe the stock's valuation discount relative to its investment banking and brokerage peer group reflects concerns about a slowdown in the company's fixed income division. We believe this accounted for the majority of its fiscal 2003 (Nov.) sales. Given its increasingly diversified revenue stream, we feel these risks have been fully reflected in the stock, recently priced at only nine times our fiscal 2003 EPS forecast. Citigroup (C ): Global economic strength forecasted by S&P in 2004 is seen driving superior revenue and earnings growth for this highly diversified financial-services entity. We believe that improving corporate credit quality and rising loan demand, accelerating capital market activity and declining credit costs can support low-double digit earnings growth through 2005, and believe the shares should trade near their historical p-e of 15 times forward earnings. Commerce Bancorp (CBH ): We feel that a favorable yield curve, along with protracted branch expansion and strategic acquisitions, should allow Commerce to generate earnings growth above its peer average. Our long-term EPS growth forecast is 23%, which compares favorably to our regional-bank peer-group average. However, the shares are priced below the peer group on a p-e-to-growth basis. Hartford Financial Services (HIG ): This multiline insurer has dual catalysts of favorable property-casualty premium pricing trends and what appears to be superior retirement savings growth opportunities. We feel the shares, priced at a discount to Hartford's peer group on a forward p-e basis, offer above-average capital appreciation potential over the coming 12 months. IndyMac Bancorp (NDE ): We see investors rewarding this technology-driven mortgage banker for controlling costs and taking share of the home lending market in 2004. In our view, the shares offer compelling value with a p-e-to-growth ratio nearly 50% below the company's financial institution peer group. MBNA (KRB ): S&P is projecting EPS growth of 16% in 2004, aided by improved credit quality, strategic acquisitions in the credit card sector and increased account balances. We believe that moderate interest rate increases forecast by S&P economists would bolster MBNA's earnings growth rate and allow for an expanded p-e multiple. Health Care Caremark Rx (CMX ): We believe this pharmacy benefits manager (PBM) is poised to benefit from the recently passed Medicare bill, which we believe will allow for accelerating revenue growth throughout the PBM industry. The pending acquisition of AdvancePCS is also expected to drive higher sales growth, while cost-synergies anticipated from the merger allow for EPS growth of about 25% over the coming five years. Caremark is our top choice in the PBM sector. Hologic (HOLX ): As the only company presently selling a direct-to-digital mammography system, a technology that appears superior to both conventional mammography and analogue-to-digital mammography, we believe Hologic should capture an increased level of market share over the coming three years. In addition, the new Medicare bill is seen as boosting demand for preventative care such as mammograms and bone-density assessment, Hologic's core business segments. Millennium Pharmaceuticals (MLNM ): We see a continued strong ramp up of Velcade sales in the U.S. in 2004, while expected European approval for multiple myeloma should result in milestone and royalty payments from Johnson & Johnson (JNJ ). In addition, we expect a modest rebound in Integrilin sales in 2004. We feel the stock is underpriced based on a net present value analysis of Millennium's existing products and drug pipeline. Mylan Labs (MYL ): Representing our top selection in the generic-drug group, we believe Mylan should generate strong sales and earnings growth over the coming three years. S&P expects Mylan to launch a generic version of Johnson & Johnson's Duragesic fentanyl pain patch by mid-2004, and Mylan has about 33 abbreviated new drug applications pending with the FDA, representing about $27 billion in branded sales. Triad Hospitals (TRI ): We see strong appreciation potential for the shares due to more favorable growth prospects for the rural hospital operators as a result of the recently passed Medicare bill. We believe the shares should command a 2004 p-e near the S&P 500. Industrials America West Holdings (AWA ): This low-cost carrier has gained market share with business travelers during 2003, and we expect that operations will be profitable in 2004 and 2005. In our view, air-travel trends will continue to improve as the economy strengthens, providing America West with solid fundamental underpinnings. We believe the stock is undervalued relative to peers on a forward p-e basis. Kaydon (KDN ): We believe this manufacturer of high-margin industrial components is boosting per-share intrinsic value through streamlined operating costs structures, improved market positions, new product offerings, and large common share buybacks. The stock was recently trading at an approximate 20% discount to our calculation of intrinsic value. Landstar (LSTR ): In our opinion, its low-asset business model allows for strong profit generation in most business conditions, and we feel that an improving economy in 2004 will drive accelerating revenue and earnings growth. We're projecting five-year EPS growth of 15%, and believe the stock should command a premium valuation relative to its peer group given its superior return on assets and return on equity. Manitowoc (MTW ): Based on S&P's forecast of a turnaround in the domestic commercial construction market in 2004, we see operating performance gradually improving, with return on equity moving towards Manitowoc's 10-year average of 18%, vs. 14% for the S&P 500. Corinthian Colleges (COCO ): We expect that rising worker ambition will drive protracted demand for adult education, and we believe the Corinthian's growth is likely to surpass that of the for-profit education industry, driven by a strategic acquisition program and new campus openings. Based on our projection for 25% growth over the coming three years, Corinthian appears attractive with a recent p-e-to-growth ratio of 0.9. Information Technology Analog Devices (ADI ): We believe the stock offers strong upside potential, based on S&P's forecast regarding semiconductor industry sales in 2004 and Analog Devices' historic ability to outpace the industry. It participates in the rapidly growing digital-signal-processors market and holds leading market share in two key high-end analog chip categories. Automatic Data Processing (ADP ): As the largest participant in the payroll-provider category, we feel ADP stands to benefit from our projected 2004 economic recovery and the associated rise in employment levels. We feel ADP offers an attractive valuation and strong balance sheet, and note that the company is among a select few outside of the financial-services industry with a AAA credit rating from Standard & Poors Credit Market Services division. Cadence Design Systems (CDN ): This company is a leading maker of electronic design automation (EDA) software, an area that we believe will show improved growth in 2004 as better profitability among chipmakers leads to the introduction of new designs. We feel Cadence will benefit from a large subscription backlog and strong renewal cycle. Flextronics (FLEX ): As the world's largest provider of electronic-manufacturing services, we feel Flextronics is well positioned to take advantage of an ongoing outsourcing trend. We believe it should generate superior earnings growth in fiscal 2005 due to its emphasis on design manufacturing and lean operating cost structure, along with improved customer demand stemming from improved economic conditions. The shares trade below their historical price-to-sales average and our calculation of intrinsic value. IBM (IBM ): We believe this leading computer hardware, software, and services company will continue to gain market share by leveraging its unique position to capitalize on the growing trend towards e-business and outsourcing. We expect strong capital appreciation in 2004, based on our discounted cash flow and price-to-sales analysis. Intrado (TRDO ): We believe Intrado will benefit from pent-up demand for both E-911 wireless services and targeted emergency-notification services for municipalities, with regulatory requirements boosting both segments. We see its scalable business model contributing to average operating earnings growth of 25% through 2006 and believe the stock is compelling, using a blended valuation approach of discounted cash flow analysis and relative p-e-to-growth analysis. Open Text (OTEX ): Recent market-share gains and acquisitions have helped to establish Open Text as a formidable player in the enterprise content management (ECM) software and services market. We maintain a bullish outlook on the ECM market, as corporations and government entities aim to both manage growing volumes of digital information and comply with regulatory requirements associated with content archiving and production. In our view, the stock is compelling, based on a relative valuation and discounted free cash flow basis. Materials Smurfit-Stone Container (SSCC ): We expect to see a strengthening manufacturing sector to boost demand for corrugated containers and packaging products, helping to give Smurfit-Stone's earnings a lift. The shares appear attractively valued at a substantial discount on a discounted cash flow basis. Sealed Air (SEE ): Demand for its protective/specialty packaging products in 2004 should improve as the global economy recovers, and we see it also benefiting from more profitable new products and continued strength in food packaging. We see operating margins expanding on price initiatives and plant efficiencies, and believe the shares are compelling with a recent p-e multiple about 20% below the stock's historical average. Telecommunications Services Nextel Partners (NXTP ): This company appears to be emerging as the market leader in rural to suburban U.S. markets, focusing on business and high-end individual customers. We expect Nextel Partners to maintain one of the industry's highest monthly average of revenues per user and lowest monthly customer churn rates. In addition, we feel the competitive risks of number portability and push-to-talk offerings could have a relatively muted impact on Nextel Partners, due to its presence in smaller markets with fewer competitors. Utilities Reliant Resources (RRI ): The shares of this energy merchant are attractive, in our opinion, due to improving operational visibility and a rising level of free cash flows. We expect that concerns over liquidity and management credibility will recede due to the consummation of asset divestitures, settles with regulatory agencies and management changes.  All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
BW MALL
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