Markets & Finance

Downgrading Enzon to Hold


Enzon (ENZN ): Downgrades to to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Frank DiLorenzo

Enzon announced that Phase III results of PEG-Intron to treat chronic myelogenous leukemia did not meet endpoint of non-inferiority compared to it standard Intron A. However, the primary driver for PEG-Intron will be a combo treatment for hepatitis C, which currently is under FDA review for this indication and could be approved by August. S&P expects $0.08 EPS for Q4 2001, sees fiscal 2001 (June) EPS at $0.27 and fiscal 2002 EPS at $1.10. Taking a more conservative stance on future PEG-Intron sales and based on S&P's present value analysis, S&P feels shares are fairly valued.

Varian Semiconductor (VSEA ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Robert Tortoriello

The leading ion implant equipment maker warned June quarter revenues will be $125 to $135 million vs. previous guidance of $145 million. While warning isn't out of line with news from other equipment makers, S&P believes that with the stock up 135% from its 52-week low, investors will want to see positive signs of an industry recovery and a return to quarter-to-quarter growth for Varian before buying the shares. With the stock trading at 38 times S&Ps revised 2002 EPS estimate of $1.02 and 2.2 times estimate 2002 sales, S&P believes shares are fairly valued for now.

ATMI Inc. (ATMI ): Initiating coverage with 3 STARS (hold)

Analyst: Robert Tortoriello

The company supplies specialty materials, packaging and delivery systems, sensors, abatement equipment, and services to the semiconductor industry. ATMI stands to benefit as demand for increasing chip performance and manufacturing efficiency drives the use of new materials. S&P views ATMI as well managed, with a diversified product portfolio and solid growth prospects. However, with shares up 90% from 52-week lows and at 22 times S&P's 2002 EPS estimate of $1.27, and 2.6 times S&P's 2002 sales estimate, S&P believes ATMI is fairly valued for now.

General Electric (GE ) and Honeywell (HON ): Maintains 3 STARS (hold)

Analyst: Robert Friedman

It looks like the European Union wants GE to divest GE Capital's Aircraft Services (GECAS) unit as a condition of the merger. The EU is worried that the unit, a huge global aircraft financier and buyer/lesser, would strong-arm aircraft makers and airline customers into buying not only GE jet engines, but Honeywell's cockpit controls, landing-gear and power units -- potentially suffocating competition. EU's demands could kill the deal, as GECAS is an integral part of GE Capital. However, the potential deal-killer does not alter cash flow models, which indicate GE and Honeywell are fairly valued, at best.

Autozone (AZO ): Maintains 3 STARS (hold)

Analyst: Efraim Levy

The auto-parts retailer says it will report non-recurring charges during the August quarter. Preliminarily, Autozone expects charges to aggregate $50 million to $75 million, after tax. The charges will reflect the closure of 30 to 60 of the company's more than 3,000 stores, and a possible writedown of value of Autozone's heavy-duty truck parts unit and other items. The company remains comfortable with the S&P and Street mean consensus estimate of $0.96 for fiscal Q4, based on 4% to 5% higher comparable-store sales seen this quarter to date. Based on S&P's fiscal 2002 estimate of $2.58, the shares are reasonably valued.

RF Micro Devices (RFMD ): Initiating coverage with 2 STARS (avoid)

Analyst: Robert Tortoriello

The company is the leading supplier of power amplifier integrated circuits used in wireless phones and other wireless applications. RF Micro recently announced a strategic alliance with Agere Systems that will give RF Micro access to new technology and add wafer fabrication capacity. S&P is seeing rapid growth in modules, which combine several power components in a single package. However, RF Micro's stock is up 90% from its 52-week low, and is selling at 14 times trailing sales and 76 times S&P's fiscal 2003 (March) EPS estimate of $0.37. S&P would avoid the shares until earnings begin to catch up with the price.


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