Markets & Finance

Downgrading Safeway to Hold


Safeway (SWY): Downgrades to 3 STARS (hold) from 5 STARS (buy)

Analyst: Phillip Seligman

Safeway posted pro-forma Q2 EPS of $0.63 vs. $0.55, before a one-time charge, meeting the Street's consensus. Sales were up 7.7%, reflecting Genuardi's acquisition, new stores, and higher sales at continuing stores. Same-store sales were up 1.7%. Gross margin was wider on better buying practices, lower shrinkage and growth is sales of store-brand products. But S&P notes year-ago sales rose 17% and same-store sales were up 4.9%. S&P is shaving the 2001 EPS estimate by $0.01 to $2.60, and is trimming the 2002 estimate by $0.02 to $2.98. The downgrade reflects slower total and same-store sales growth and renewed market interest in other economically-sensitive sectors.

AT&T (T): Maintains 3 STARS (hold)

Analyst: Craig Shere

Shares of AT&T are higher on the news of Comcast's hostile offer for AT&T's broadband unit. The offer of 1.0525 billion Comcast shares plus $13.5 billion of of assumed debt is below the per-subscriber market value of AT&T's publicly traded peers. However, AT&T's cable EBITDA margins, only 16% in Q1, are well below the industry average. Comcast has a history of quickly improving its acquired businesses, but with Comcast down 8% on the news, AT&T holders may need more inducements. S&P thinks the deal could jeopardize Comcast's credit if more debt is assumed or if Comcast adds a cash component to the price. Also, the regulatory hurdle for merger of the No. 3 and No. 1 cablers could be difficult.

Comcast Corp. (CMCSK): Maintains 5 STARS (buy)

Analyst: Howard Choe

News reports say Comcast is making an unsolicited offer for AT&T's broadband division for $58 billion including the assumption of debt. S&P sees the deal as shrewd as Comcast would acquire AT&T's broadband assets for about half of AT&T's cost; AT&T meanwhile has already invested heavily in cable upgrades. On a per subscriber basis ($4,100), the value is at a slight discount for major peers. The deal has great potential for margin improvement (AT&T's margins are half of its peers at 19%). Comcast estimates $1.25 billion in savings; and $2.6-$2.8 billion over the longer term. S&P sees the regulatory climate more hospitable for the deal.

NCR Corp. (NCR): Maintains 3 STARS (hold)

Analyst: Megan Graham-Hackett

The information technology provider preannounced a Q2 shortfall and sees EPS of $0.35-$0.37 vs. the Street's mean $0.57 and vs. S&P's $0.48 estimate. The company expects $1.5 billion in revenue, up 3%, in line with S&P's estimate but below the company's 5% target. NCR cited customer deferrals in Data Warehousing as the main reason for the shortfall. Segment revenues are up just 2% vs. S&P's 10% forecast. Not surprisingly, the worst impact was in Americas in telecom, and in retailing in NCR's Teradata business as customers deferred upgrades. S&P is cutting the 2001 EPS estimate to $2.28 from $2.60. With shares trading at 17 times that estimate, NCR is at a discount to peers.

Biomet (BMET): Maintains 4 STARS (accumulate)

Analyst: Robert Gold

The medical device company's May-quarter operating EPS was in line with Street consensus, and a penny above the S&P estimate at $0.33 vs. a year ago's $0.29. Revenue growth was balanced across product lines. Excluding the foreign exchange impact, and despite an interruption in Japan as the company moves towards a direct sales model, sales from continuing products gained 18%, driven by solid gains in core reconstructive devices (up 10%), dental implants (11%), fixation (13%), spinal (86%) and other (28%) markets. Gross margin reached 71.6% vs. 69.8%. Biomet's conference call is scheduled for Monday at 2:00 p.m. ET.


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