Markets & Finance

Upgrading Circuit City Stores


Circuit City Stores (CC): Upgraded to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Thomas Graves

The retailer guided expectations toward May quarter EPS of $0.04, better than expected. Sales from the consumer electronics business remain weak, but profits in both this area and in the CarMax unit are expected to be above S&P's prior estimates. S&P raised its fiscal 2002 (Feb.) EPS estimate to $0.90, from $0.80, with most of the fiscal year's EPS coming in Q4. S&P still sees favorable long-term prospects from the shift to digital products. But the prospect of relatively weak sales from the consumer electronics business in next quarter or two, and the risk of February quarter EPS disappointment limit S&P's bullishness on the stock.

Hewlett-Packard (HWP): Maintains 3 STARS (hold)

Analyst: Megan Graham-Hackett

H-P held an analyst meeting on June 6. The company said, based on May sales, that the U.S. economic slowdown has spread globally and has impacted every segment of its business -- and every region it operates in. H-P is now cautious on its prior Q3 revenue guidance of flat to down 5%, but will take further cost cut efforts to meet the Wall Street mean estimate of $0.23. S&P is keeping its $0.22 estimate. The company also admitted that it has been hurt by internal execution issues and that H-P's "reinvention" will take time. It notes the pricing environment is likely to intensify. S&P made no change to its below-consensus fiscal 2001 (Oct.) $1.08 EPS estimate. Trading at 27 times that figure, the shares merit a hold rating.

Priceline.com (PCLN): Maintains 3 STARS (hold)

Analyst: Scott Kessler

Priceline is surging on news that Hong Kong's Cheung Kong (Holdings) Ltd. and Hutchinson Whampoa Ltd. have increased their stakes in Priceline by over 71% to 60.1 million total shares. Each company now holds some 15% of Priceline stock. In addition, the companies will have two additional seats on Priceline's board of directors, adding to one held by Hutchinson now. S&P is encouraged by the vote of confidence and purchase of shares from infamous founder and former Chairman and CEO Jay Walker, but fundamentals and notable challenges remain unchanged.

Amazon.com (AMZN): Maintains 3 STARS (hold)

Analyst: Scott Kessler

On Tuesday, the online bookseller held its annual day-long analyst meeting, during which the company communicated its bullish stance as to 2002 and 2003. Amazon detailed its U.S. growth opportunities reflecting enhanced customer merchandising, increased product bundling efforts, institutional book sales, used product marketplace, and its PC store. International and services/platform segments are potentially still extremely significant. Fulfillment and customer service improvements will also bolster the bottom line. S&P was impressed by the story and the affirmation of pro-forma profits in Q4 and 2002. But S&P would hold the shares in the absence of near-term catalysts.

General Electric (GE): Maintains 3 STARS (hold)

Analyst: Robert Friedman

The Wall Street Journal reported Wednesday that GE is willing to sell its regional jet-engine operations to help close the Honeywell deal. This would be big concession, as the regional jet market is one of the few fast-growing sectors in an otherwise mature aircraft industry. The concession highlights the importance of the Honeywell deal to GE, and S&P believes GE needs Honeywell to help meet short-term EPS growth targets. As GE is is exchanging its high p-e stock for a low p-e Honeywell stock, the deal would be automatically EPS accretive. Also, an expected $4.3 billion merger charge could smooth EPS results down the road. S&P thinks GE is fairly valued at best.


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