Markets & Finance

S&P: Still Accumulate Shaw Group


Shaw Group (SGR): Maintains 4 STARS (accumulate)

Analyst: Stewart Scharf

S&P believe rumors of accounting issues are unfounded, and that Shaw's fundamentals are strong. S&P expects the provider of piping systems and electrical and construction services to continue to benefit from robust demand for power generation capacity. Shaw booked over $1 billion in new projects in fiscal 2001 (Aug.) Q2 and increased its backlog 50% sequentially. The integration of acquired Stone & Webster has exceeded expectations, and should contribute to volume growth. With shares now trading at only 21 times S&P's $1.70 estimate for fiscal 2002, S&P sees an opportunity to add to positions.

Lockheed Martin (LMT): Maintains 3 STARS (hold)

Analyst: Robert Friedman

The airspace and defense contractor says that expected hikes in the U.S. defense budget will fuel near-term EPS growth. However, S&P believes the company's value is ultimately based on a combination of sustainable long-term EPS growth and return-on-equity performance. With highly volatile, unpredictable defense budgets, intensifying competition, and poor economics of the defense industry, S&P doesn't believe 25%-30% EPS growth rates are sustainable. Instead, S&P forecasts a sustainable EPS growth rate of 5% and return-on-equity of 15%, at best. The stock is at the top of its $28-$37 range.

Northwest Airlines (NWAC): Maintains 3 STARS (hold)

Analyst: Richard Stice

Northwest sees a Q2 loss of $50-$75 million, worse than the Street's expectations. The company cites the weak economy and high fuel prices. Northwest forecasts improvement for Q3 on strong leisure travel bookings. However, the airline still expects a challenging environment for the rest of

2001. A recent contract agreement with mechanics should provide stability and strengthen its customer base. S&P is lowering

the 2001 $2.05 EPS estimate to a loss of $0.25. Until travel demand improves, S&P expect shares to perform in line

with the broader market.

Tellabs (TLAB): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Ari Bensinger

Tellabs sees June-quarter sales at $500 million, and break-even EPS, well below S&P's $800 million and $0.31 EPS estimate. The company says gross margins will fall to the low 40's vs. 52% last quarter. While the lower guidance was largely expected, the extent of the reduction is shocking. Given excess network capacity, carriers are only buying equipment to meet their immediate needs. Tellabs is accelerating cost controls and expects quarterly operating expenses of $225 million, below the previous $245 million target. S&P doesn't expect any meaningful telecom spending recovery before mid-2002.

Jabil Circuit (JBL ): Maintains 3 STARS (hold)

Analyst: James Corridore

Jabil posted Q3 fiscal 2001 (Aug.) cash EPS of $0.16 vs. $0.21, in line with the Street's consensus. Revenues were up 9% year over year, and down 14% sequentially, not bad in the current environment. Gross margins narrowed by 120 basis points on the lower revenues. For Q4, Jabil guided revenues to $950 million to

$1.05 billion, with $0.13-$0.15 cash EPS, a large downward

revision to current expectations. S&P is encouraged by inventory improvement and profitability in the current environment. However, given the lack of signs of strength or visibility, S&P would not add to positions.

UAL Corp. (UAL): Reiterates 2 STARS (avoid)

Analyst: Richard Stice

As a result of weakening travel demand, United sees a double-digit decline in Q2 unit revenue. Higher fuel and labor costs also are negatively impacting results. To help offset the slowdown, United is reducing its 2001 budget and capital

spending plans. The initiatives are expected to save about $300

million. S&P is lowering the 2001 estimate by $4.60, to a loss of $8.10. The US Airways acquisition is still pending, and S&P views the deal as doubtful. With a poor business travel outlook and unresolved labor issues, S&P believes shares will underperform the broader market.


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