Markets & Finance

Still Hold GE, Honeywell as Europe Mulls Merger


General Electric (GE) and Honeywell (HON): Reiterate 3

STARS (hold)

Analyst: Robert Friedman

As expected, U.S. regulators agreed to the merger but S&P doesn't think U.S. approval will pressure EU regulators to expedite their extended review process. EU is assessing whether GE's "one-stop shopping" potential, along with its giant financial arm, gives the company unfair competitive advantages. S&P believes GE will ultimately make tough concessions to get the deal done, and S&P suspects the company needs a big one-time EPS bump-up to maintain its 15% EPS growth in 2001. S&P also thinks Honeywell holders are getting a good deal. However, S&P's models indicate GE is fairly valued at best.

Echostar (DISH): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Howard Choe

The satellite company posted Q1 EBITDA of $51 million vs. year-ago negative $88 million. Subscriber growth is up an impressive 47%, and even higher revenue growth of 67% suggests a rise in revenue per subscriber. S&P attributes this to additional set-top boxes and high-speed data. Despite the higher subscriber acquisition cost, overall improvement in costs impressive as fell 700 basis points on Echostar's leveraging of its higher revenue base. S&P now sees free cash flow positive in late 2001 or early 2002. S&P is upping its 2001 EBIDTA estimate to $0.74 from $0.50.

Silicon Valley Group (SVGI): Maintains 3 STARS (hold)

Analyst: Thomas Smith

The chip-equipment manufacturer announced an agreement with the Committee on Foreign Investment in United States to permit acquisition by Netherlands-based ASM Lithography (ASML). Silicon Valley subsidiary Tinsley Laboratories, which brings in about 2% of sales, had been the focus of the controversy over its defense role of its lens-making operation. Tinsley will either be spun off or operated under the Committee's guidelines, clearing the way for a long-expected deal. Silicon Valley is trading right at takeover value of 1.286 shares of ASM per Silicon Valley share. The combined company will be a fair match for Japan's Nikon.

PacifiCare (PHSY): Maintains 3 STARS (hold)

Analyst: John Massey

The health care firm posted Q1 EPS of $0.37 vs. $2.04, both before one-time items - a penny above S&P's estimate on selling, general and administrative spending cuts and fewer shares. The EPS dropped on higher-than-anticipated medical cost utilization as the firm shifts to more risk-based provider contracts. Revenue is up 7% on 10% commercial yield, 6% Medicare yield, and a 50% rise in its behavioral health unit. Commercial HMO enrollment is down 10% and Medicare rose 1%. Medical loss ratio is 90.2% vs. 89.4% on higher physician and hospital utilization. Shares are fairly valued at 11.6 times S&P's 2001 EPS estimate of $2.75, despite medical cost concerns.

Compuware (CPWR): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Before special charges and amortization expense, Compuware posted March quarter EPS of $0.16 vs. $0.15, in line with estimates. Revenue fell 12% from last year, but rose 3.9% from the December quarter on good growth in software license fees -- in line with the company's April 6 preannouncement. Operating margin widened to a solid 14.1% from the year-ago 13.4% and 11.6% in the December quarter. Compuware is reducing its focus on the large deals and legacy segment, and is pursuing opportunities in distributed systems for better operational linearity and consistency. The firm still is likely to benefit from IBM's new mainframe cycle and operating system. S&P would hold the shares at 14.5 times the fiscal 2002 (March) estimate of $0.75.


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