Markets & Finance

Sell Washington Group


Cox Communications (COX): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Howard Choe

Cox is the 5th-largest cable operator to benefit from Friday's U.S. Court of Appeals ruling to strike down the FCC's imposed 30% ownership cap for cable operations, which should spur industry consolidation. With one of the more advanced cable systems, Cox has attractive assets. Penetration of advanced services for homes is one of highest in the industry. Cox also is one of the few operators offering high-speed data, digital cable, cable telephony, and video-on-demand. With a sound balance sheet, Cox could be acquisitive as well. S&P believes speculation could drive the shares to the high 40s.

Washington Group (WNG): Maintains 1 STARS (sell)

Analyst: Stephen Scharf

Shares are down today following a 79% plunge on Friday. The civil engineering company says Raytheon failed to provide an audited balance sheet on E&C unit's contracts acquired by Washington Group. The company identified $500 million in added cost overruns seven weeks after a July 7, 2000 deal closing, plus $200 million more after Q3. With only $200 million in cash, Washington Group needs $300-400 million to meet liquidity requirements by the end fiscal of 2001 (Nov.) or its negative cash flow will be near $500 million. The company is trying to complete talks with banks by the end of March, but because Washington Group is in technical default, S&P suggests selling shares.

Vitesse Semiconductor (VTSS): Maintains 5 STARS (buy)

Analyst: Thomas Smith

Makers of high-performance chips for communications markets have lowered their guidance for the March quarter as demand slackens. Vitesse revisions appear to be the least severe, and shares are down less in pre-market quotes. Cypress (CY) also is moving to a more conservative revenue recognition system, taking a charge this quarter for a good cause. Visibility remains weak for communications chip companies, but the sector offers potential for a sharp rebound in share prices whenever economic growth finally returns.

Seitel (SEI): Reiterates 5 STARS (buy)

Analyst: Markos Kaminis

Seitel's Q4 2000 operating EPS was $0.37 vs. $0.12, in line with our high-end estimate. Revenues soared 57%, driven by strong demand for the firm's largest seismic database covering North America. Library sales measured 68% of total revenue. EBITDA margin continued its sequential quarterly expansion begun in late 1999, widening 60 basis points. Seitel is bidding on seismic databases that would be accretive to EPS. S&P sees Seitel outperforming peers, due to the great demand for its geographical expertise and its current discount valuation to the peer group. S&P is placing the firm's 2001 $1.29 EPS estimates under review for an increase.

Mercury Interactive: Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Mark Basham

The stock is down 73% from its 52-week high, off about 17% since early morning last Friday. S&P believes this price decline is indicative of a major bottom in the stock. Fundamentally, Mercury is now somewhat undervalued. S&P thinks that at 40 times its 2002 EPS estimate, the stock will be back in the low to mid $50's over 6 to 12 months for a 20% gain or more. S&P sees a small risk of minimal further downside and thinks aggressive accounts should add the stock to their positions.


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