Markets & Finance

Upgrading Commercial Metals to Accumulate


Commercial Metals (CMC ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Leo Larkin

Commercial Metals posted May-quarter EPS of $0.82 vs. $0.92, with sales down 11.3%. The EPS decline was led by a sharp drop in recycling and marketing/trading units, which offset a rise in steel. The company sees August-quarter results flat from May-quarter results, and significantly better performance

in fiscal 2002 (Aug.) on internal improvement and the better economy. S&P sees see $1.60 EPS for fiscal 2001, and $2.75 for fiscal 2002. Commercial Metals will benefit from lower imports, contributions from start-ups, and recovery in other its two units in fiscal 2002. Working capital has improved, and this should help should generate free cash flow in fiscal 2002, enabling debt reduction.

Lehman Brothers (LEH): Maintains 5 STARS (buy)

Analyst: Michael Schneider

Lehman Brothers posted May-quarter EPS of $1.38 vs. $1.39, well above expectations. S&P says very strong results in fixed income underwriting and capital markets businesses offset weaker results in equity businesses. S&P is encouraged by Lehman's market share gains in high-margin high-yield debt and equity IPO underwritings, and sees Europe as a major source of growth going forward. S&P looks for merger and acquisition revenues to rebound later this year as corporate earnings and equity markets begin to recover. S&P sees fiscal 2001 (Nov.) EPS at $6.00. With modest price-to-earnings and strong growth prospects, Lehman is very attractive.

Goldman Sachs (GS): Maintains 4 STARS (accumulate)

Analyst: Michael Schneider

Goldman Sachs posted May-quarter EPS $1.06 vs. $1.48, in line with expectations. Net revenues fell 4% as 50% lower investment banking revenue and a 4% decline in asset-management revenue outweighed a 21% rise in trading revenues. Investment banking revenue was hurt by lower financial advisory revenue and lower

worldwide equity issuances. Trading revenue benefited

from a strong fixed-income and commodities-trading

environment. S&P sees fiscal 2001 (Nov.) EPS at $5.75. Goldman remains attractive on healthy long-term growth prospects, despite current weak business conditions.

Oracle (ORCL): Maintains 4 STARS (accumulate)

Analyst: Jonathan Rudy

S&P thinks the company's stock price reflects after hours trading. ORCL posted Q4 fiscal 2001 (May) EPS of $0.15 vs. $0.15, a penny above estimates. Revenues declined 3%, as license sales decreased 10%, but services rose 5%. License sales in Americas decreased 17%, and were flat in Europe. Asia Pacific remained solid with a 10% rise. Applications sales were weaker than expected with a 24% decline. However, operating margin was wider than S&P's expectations at 39.7%. S&P is maintaining the $0.52 fiscal 2002 EPS estimate. With improved profitability, a return-on-equity over 40%, and 15-20% long-term growth, S&P says still accumulate shares of this industry leader.

AMR Corp. (AMR ): Maintains 4 STARS (accumulate)

Analyst: Richard Stice

AMR expects a Q2 loss in excess of $100 million, much worse than Street expectations. The company cited a sharp reduction in business travel demand and high fuel prices. To help combat an economic slowdown, AMR will retire 22 aircraft by Q1 2002.

Retirements will decrease the 2002 capacity about 1%. S&P is lowering its 2001 EPS estimate to $1.00 from $3.75. However, with market share gains from the recent TWA transaction, and a more favorable interest-rate environment, S&P expects shares to

outperform the broader market over the next six to 12 months.

Solectron (SLR): Maintains 3 STARS (hold)

Analyst: Jim Corridore

Solectron posted Q3 fiscal 2001 (Aug.) cash EPS of $0.12 vs. $0.30, missing consensus by one cent. Revenues were down 26% sequentially, up 9% from the prior year. Solectron saw a significant slowdown across all sectors. The company took a $285M charge in Q3 to downsize and cut staff. Solectron guided to $3.0 billion to $3.5 billion in revenues in Q4 -- a 12%-24% sequential drop. Q4 EPS is targeted in the range of $0.05-$0.09. With no signs of strength on the horizon, S&P says don't add to positions. Though OEMs bear the ultimate inventory risk, bloated inventory levels are hurting asset management.


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