Markets & Finance

A Dose of Alza Will Boost Johnson & Johnson


Johnson & Johnson (JNJ): Maintains 4

STARS (accumulate)

Analyst: Robert Gold, Herman Saftlas

Johnson & Johnson will buy Alza Corp. (AZA) for nearly $11 billion of stock. The deal should help raise visibility on Johnson & Johnson's pharmaceutical growth rate in coming years, and add some innovative drug delivery technology to its mix, which could help extend some product life cycles. S&P views the transaction as strategically significant for Johnson & Johnson, and at full price for Alza shareholders. But the deal also may dilute Johnson & Johnson's 2001 EPS by $0.14 and 2002's EPS by $0.05, using conservative assumptions for selling, general and administrative and other cost synergies. S&P is lowering its 2001 estimate by $0.14 to $3.70, and sees 2002's EPS estimate at $4.35.

Maytag (MYG): Reiterates 2 STARS (avoid)

Analyst: Efraim Levy

Maytag is suffering from lower industry demand, intense price pressure and a weaker mix in its major appliance business, as well as less efficient bottle-vending equipment production rates amid slow demand. As a result, Maytag may not meet its $0.45 Q1 EPS consensus forecast, although it still anticipates exceeding Q4's $0.40 EPS. S&P is maintaining its below-consensus EPS forecast at $2.51 for 2001, which excludes a $0.53-per-share tax benefit expected in Q1. Continue to avoid Maytag as the economy weakens.

General Electric (GE) Maintains 3 STARS (hold)

Analyst: Robert Friedman

Knowing a mediocre business when it sees one, GE may be close to selling its fleet of 28 satellites for about $5 billion in cash/stock to SES, a big European satellite services company. SES is looking to become a major player in the fledgling satellite-based broadband services industry. Many segments of the capital-intensive satellite services industry are becoming commodity businesses. Also, GE sees looming broadband overcapacity. Since GE is trading at only a slight discount to the lowest end of the fair-value range, S&P is reluctant to upgrade.

Ericsson (ERICY): Reiterates 3 STARS (hold)

Analyst: Ari Bensinger

The mobile phone market is being hurt by lower replacement demand, reduced operator subsidies, high inventory levels and continued price pressures. Given the difficult environment, Ericsson is stepping up efforts to streamline operations and reduce costs. The firm will cut 2,100 employees in Sweden and terminate production at two U.K. mobile phone plants. The program is expected to yield an annual cost savings of at least SEK20 billion by 2002. Ericsson will announce additional efficiency measures with Q1 results on April 20. S&P believes the difficulties already are reflected in the beaten-down share price.

Vitesse Semiconductor (VTSS): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Thomas Smith

The company lowered its revenue guidance for the second time this month, reflecting a rapid deterioration of orders. Vitesse now is expecting 27% a quarter-over-quarter revenue decline in the March quarter versus the 5% decline previously modeled. S&P is cutting its fiscal 2001 (Sept.) EPS estimate (pro forma) to $0.63 from $0.95, and trimming the fiscal 2002 estimate to $0.95 from $1.25. The company is reviewing cost-saving steps. On the bright side, Vitesse is still winning design competitions, has near $1 billion in cash and investments, and has the development edge in certain high-speed substrates. Shares are trading at 11 times the price-to-sales multiple, in line with peers.

Scholastic Corp. (SCHL): Maintains 5 STARS (buy)

Analyst: William Donald

S&P expects Scholastic to recoup Monday's 14% freefall. The company declined to make a full bid for eToys after determining that the potential acquisition would not meet the threshold for accelerating Scholastic's web initiatives nor reduce costs. The weekend bid of $8 million for eToys' inventory was conditioned on winning the auction this week for all shares in reorganized company if the costs and benefits made such a purchase feasible. In light of many uncertainties, the market reacted negatively. Now, Scholastic is a bargain at 13 times S&P's $2.63 fiscal 2001 (May) estimate.


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