Markets & Finance

Downgrading Capstone Turbine to Accumulate


Capstone Turbine (CPST): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Craig Shere

Shares are down some 55% since late May. The initial drop is attributed to weakness in the broader power technology group and concerns regarding microturbine offerings from deep-pocketed conglomerates. More recently, however, Capstone weakness is overshadowing peers. Combined with the mid-June disclosure of share sales by the CEO and CFO, as well as significant major shareholders, technical weakness warrants a more conservative posture. While existing fundamental information are still positive, more information is needed to alleviate technical concerns.

Genentech (DNA): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Frank DiLorenzo

Genentech and its partner Novartis received response from the FDA on Xolair for treating allergic asthma. The FDA is requesting more data, and the two companies will need to resubmit data in the future. S&P is uncertain about the process of resubmission and potential approval, and feels the delay will have a major impact on valuation. Conversely, S&P says Phase III data for Genentech's Xanelim to treat psoriasis is better than expected, and could potentially be approved by early 2003. S&P sees 2001 EPS at $0.74, and is trimming the 2002 EPS to $0.91 from $0.94. Genentech is fully

valued, based on the present value of its products and the pipeline.

DuPont Photomasks (DPMI): Initiating coverage with 3 STARS (hold)

Analyst: Robert Tortoriello

The leading maker of masks used to imprint circuit patterns on semiconductor wafers continues to benefit from a chip-industry trend towards outsourcing. Also, the company should benefit from its line of advanced photomasks, which allow manufacturers to work with smaller circuit sizes without new equipment. However, mask orders remain very slow, despite the fact that new integrated circuit (IC) designs usually lead the industry out of a downturn. At 2.5 times the trailing price-to-sales multiple and 36 times S&P's fiscal 2002 (June) EPS estimate of $1.22, DuPont Photomasks is appropriately valued for now.

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

Analyst: Stewart Scharf

Shaw posted May quarter EPS of $0.42 vs. $0.23, above expectations. Strong sales growth was driven by demand for domestic power generation. The backlog is up more than four-fold, year to year, to $3.6 billion. The company should continue to benefit from the integration of Stone & Webster, as well as wider engineering margins. S&P expects that cyclical downturns will be mitigated by a diverse product mix of customers and more long-term client relationships. Shares are still lofty -- trading at 29 times S&P's fiscal 2001 (Aug.) EPS estimate of $1.45. But with a 21% projected EPS growth to $1.75 in fiscal 2002, S&P thinks shares are 34% off their highs and says investors can add to their positions.

Corning (GLW): Maintains 3 STARS (hold)

Analyst: Ari Bensinger

Given sharply lower demand for optical components, Corning is lowering the cost structure of its photonics division and will close three plants and eliminate 1,000 employees. The chemical company also will take a $5.1 billion Q2 charge for goodwill impairment and inventory write-offs. Corning says Q2 operating income is slightly ahead of the Street's mean EPS estimate of $0.17 on better fiber volume, but expects EPS for the second half to be below consensus. S&P sees 2001 photonic revenue falling 30%-40% to $600-$700 million, below S&P's already-reduced estimate of $740 million. S&P believes the telecom

spending downturn could last another 12-18 months.


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