): Downgraded to 3
STARS (hold) from 4 STARS (accumulate)
Analyst: Craig Shere
WorldCom's Q1 operating EPS were $0.25 vs. $0.41, below expectations. The company is targeting a summer distribution of WorldCom Group and MCI Group tracking shares. S&P is concerned that MCI Group will not meet its 2001 cash flow goals. Based on more conservative assumptions, S&P now sees Worldcom valued around $15-$17 a share and MCI around $5-$6 a share. S&P expects free cash flow to break even for both the combined operations and WorldCom Group in 2002. With the development of growth businesses and improving cash flows, S&P sees limited downside risk. However, a more positive outlook is subject to the management of WorldCom's mature businesses.
Baker Hughes (HI
): Downgraded to 3 STARS (hold) from 4 STARS (accumulate)Analyst: Tina Vital
The drilling products firm reported Q1 PS of $0.21 vs. $0.04 one year earlier, $0.01 below the Wall Street consensus estimate. Operating income rose 114% on North American demand for natural gas, and on higher pricing. Oil field margins were wider, partly offset by weak results at its Baker Process unit (which S&P sees at break-even for 2001) and by lower lifting in exploration & production (E&P) operations. The outlook for Baker Hughes is good on strong North American activity and a pickup in international business. S&P sees PS of $1.19 in 2001 and $1.80 in 2002. But with the shares trading in line with the company's peers at 30 times the S&P 2001 estimate, and with weakness in its process unit, Baker Hughes is fairly valued.
Amerada Hess (AC
): Maintains 4 STARS (accumulate)Analyst: Tina Vital
The company posted Q1 PS of $3.79 vs. $2.47 one year earlier, $0.61 above the Wall Street consensus forecast. Exploration & production (E&P) earnings were up 26% on higher U.S. natural gas prices; refining & marketing profits were up 119% on wider margins. The company has hedges on about 46% of oil and 30% of gas through 2002. Production, as measured on a barrels of oil equivalent (BOE) basis, was up 7%. E&P spending was up 150%, including $98 million for Gulf of Mexico gas reserves. The company is still seeking acquisitions.S&P sees 2001 EPS at $11.59, 2002 at $9.06. With the shares trading at 7 times S&P's 2001 EPS estimate -- a discount to its peers -- accumulate Amerada Hess.
Electronic Data Systems (EDS
): Maintains 3 STARS (hold)Analyst: Jonathan Rudy
EDS posted Q1 operating EPS of $0.56 vs. $0.47 one year earlier, in line with analysts' expectations. Revenues from its base business were up 13%, above S&P's estimates. This growth rate should slow for the rest of 2001. However, Q1 contract signings rose 67%, stronger than expected. S&P is maintaining its 2001 EPS estimate at $2.56. Operating margin should stabilize, since EDS has realized benefits from previously implemented cost reduction and productivity plans. With growth likely to slow in a challenging economic environment, S&P would hold the shares of EDS at 25 times the 2001 estimate.