Markets & Finance

'Accumulate' Bear Stearns


Bear Stearns (BSC): Maintains 4 STARS (accumulate)

Analyst: Michael Schneider

The investment banking firm agreed to acquire Wagner Scott Mercator, one of the leading specialist firms on the NYSE for $625 million. The deal should close in Q2 of 2001, subject to usual regulatory approvals, and be immediately accretive to the company's EPS. The deal will make Bear Stearns one of the largest specialist firms on the NYSE. The specialist business is rapidly consolidating. Goldman Sachs bought Spear, Leeds & Kellog last year and last month agreed to buy Benjamin Jacobson & Sons. S&P sees Bear Stearns posting EPS in fiscal 2001 (Nov.) of $6.25. Its shares are attractive on modest P/E and solid growth prospects.

Merck (MRK): Maintains 3 STARS (hold)

Analyst: Herman Saftlas

The drug maker maintained its 2001 EPS comfort zone of $3.15-$3.25 as new drugs offset off-patent declines. Merck projects impressive gains in Vioxx, with sales in the $3-$3.5 billion range vs. 2000's $2.2 billion, and predicts sales in Zocor, Fosamax, Cozaar/Hyzaar, Singulair will offset a 37% combined decline in Vasotec, Pepcid, and Mevacor. S&P sees gross margins narrowing four points to 40% on reduced sales of patent-expired drugs and a higher proportion of lower-margined Merck-Medco revenues. Merck's pipeline is relatively thin compared with Pfizer's. Merck is adequately valued at a modest discount to the drug-group average multiple.

Human Genome (HGSI): Maintains 4 STARS (accumulate)

Analyst: Frank DiLorenzo

The drug developer posted a Q4 loss per share (pro-forma) of $0.05; we expected a $0.20 loss. The firm sees a $0.56-$0.72 loss for 2001, and says it should see Phase II results for Repifermin and MFIP-1 in 2001. Human Genome could see the start of trials for BlyS antibody in autoimmune diseases, radiolabeled anti-BlyS in cancer, FasTR in viral diseases, and new compounds reaching clinic trials via its partners. In comparison with other major genomics-based firms, S&P thinks the company is the most advanced in discovering and developing gene-based drugs. S&P also thinks the firm's business model makes sense, and sees its upside as "solid" if the firm's gene-based drug developments are successful. S&P thinks its shares are speculative.

Dow Chemical (DOW): Maintains 3 STARS (hold)

Analyst: Richard O'Reilly

The chemical concern sees Q1 EPS below earlier guidance of $0.25-$0.40 for Dow, without the merger of Union Carbide. The lower guidance reflected a greater??han-expected loss for the old Union Carbide than the $0.53 deficit posted in Q4. Also, 30% more shares were issued in a pooling-of-interest merger completed last week. S&P now sees Q1 EPS in the mid-teens vs. year-ago $0.61 for Dow alone. S&P is cutting its 2001 estimate from $2.20 for the old Dow to $1.50, to reflect the addition of Union Carbide. Dow expects more than $500 million of costs savings over the next two years. S&P thinks Dow shares are okay to hold at 15 times the 2001 estimate.

Hormel Foods (HRL): Reiterates 4 STARS (accumulate)

Analyst: Richard Joy

The food manufacturer posted fiscal Q1 EPS of $0.30 vs. $0.30, as expected. Sales are up 4.8% on higher value-added product sales. Tonnage volume is flat, reflecting tough year-ago comparisons and the conversion from commodity to value-added products. Margins are likely to be pressured in the near term by high energy and pork costs. Hormel's accretive acquisition of Turkey Store should close this quarter and help offset commodity pressures. S&P believes that the company's core products momentum, new value-added products and share buybacks will support 12%+ EPS growth. Hormel is attractive at only 15 times S&P 's fiscal 2001 (Oct.) EPS estimate of $1.37.


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