Markets & Finance

Keeping Buy on Cendant


Cendant (CD): Maintains 5 STARS (buy)

Analyst: Thomas Graves

Cendant agreed to acquire travel services company Galileo International for stock and cash. S&P expects the acquisition to bring synergy cost savings, and increase Cendant's online travel presence. Still, S&P is somewhat wary that future self-service Internet travel booking by consumers could hurt Galileo, but sees this offset by the favorable potential from the deal. Before unusual items and the impact of some Internet-related businesses, S&P is raising Cendant's 2002 EPS estimate to $1.34 from $1.12, which assumes benefits from a prospective change in goodwill accounting. S&P also is adjusting the 2001 EPS estimate to $1.04 from $1.02.

Capstone Turbine (CPST): Maintains 5 STARS (buy)

Analyst: Craig Shere

Shares are down 45% since late May on the absence of

new microturbine sales announcements, fears over deep-pocketed competitors entering the fray (Honeywell, Ingersoll-Rand, etc.) and lowered analyst sales estimates. Monday's weakness was spurred by a press article detailing those concerns. However, Capstone's competitors make products that are ill-suited for the vehicle market, lack air-bearing technology and generally are sold as part of service contracts. Capstone's direct marketing efforts only began in Q1 (which saw 27% higher unit sales). The shares are trading at about 50% of S&P's estimated fair value.

Standard Microsystems (SMSC): Initating coverage with 3 STARS (hold)

Analyst: Richard Tortoriello

The company designs Input/Output chips that are sold to the personal computer (PC) and embedded integrated circuit (IC)markets, and also are used in applications such as ATMs, industrial controls and communications equipment. The developing chipsets control various PC peripheral functions in conjunction with Intel. S&P sees growth in embedded IC and chipset markets, guided by new company management. However, with PC markets uncertain and communications weak, S&P sees the stock fairly valued at 1.2 times the tangible book and 1.5 times sales. S&P also sees a fiscal 2002 (Feb.) loss of $0.15, and fiscal 2003 EPS of $0.37.

ENSCO International (ESV), Global Marine (GLM) and Rowan (RDC): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Tina Vital

Although the Gulf of Mexico jackup market remains strong, S&P sees temporary softening in dayrates. As annual production targets are met and as budget approval is sought for new projects, certain larger producers are on the sidelines for

the summer. Meanwhile, international drilling markets are

accelerating. Although these companies are trading at a discount

to S&P's 2001 EPS estimates, with their rigs concentrated in the Gulf, S&P recommends accumulate for now.

IBP Inc. (IBP) and Tyson Foods (TSN): Maintains 3 STARS (hold)

Analyst: Phillip Seligman

On June 15, a Delaware chancery court judge ruled that Tyson cannot renege on $3.2 billion deal to acquire IBP. He notes that Tyson wanted to back out due to buyer's regret -- that Tyson wished it had paid less for IBP in light of its and IBP's poor performances. Damages could be huge. S&P says Tyson is unlikely to appeal. Managements met on June 17 and agreed to work at completing the merger. Details aren't finalized. At pre-market levels, IBP is fairly valued at

17 times S&P's 2001 EPS estimate of $1.50, and Tyson is fairly valued at 10 times S&P's fiscal 2002 (Sept.) EPS estimate of $1.00.

Devon Energy (DVN): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: J. Kartsonas

S&P is lowering the 2001 EPS estimate by $0.55 to

$7.95, and is lowering 2002's estimate by $0.80 to $7.96. With 60% of the company's projected 2001 production being natural gas, S&P looks for lower revenues on recent weak gas prices. DRI-WEFA projects natural gas prices at $5.52/MMBTU for 2001, and $4.88/MMBTU for 2002. S&P expects Devon to increase its total production by about 5% and generate roughly $900 million in excess cash flow this year. Devon remains attractive at 92% of S&P's discounted cash flow net asset value based on 2000's proven reserves, and based on shares trading at 3.4 times S&P's 2001 discretionary cash flow estimate of $16.22.


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