Markets & Finance

Upgrading Mentor Graphics to Accumulate


Mentor Graphics (MENT): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Thomas Smith

The automation software company posted Q2 EPS $0.27 (before $0.07 goodwill and special charges) vs. $0.18 (before $0.09 goodwill). The results were above the $0.25 consensus. Revenue rose 8%. Mentor added 130 new customers, and S&P thinks this was a good quarter except for weakness in orders reported July 9, which will dampen Q3 revenue. Year-end brings the biggest deals and semiconductor industry malaise should lift enough by then to get customers to buy the software they deferred this spring. The company guided to 5% revenue growth in all of 2001, and 13% growth in 2002. Shares are trading at 13 times S&P's $1.40 2002 estimate and at 4.5 times the tangible book value.

Human Genome (HGSI): Reiterates 4 STARS (accumulate)

Analyst: Frank DiLorenzo

The biotech firm posted a Q2 loss per share of $0.16, before a debt conversion expense of $0.03, which was $0.02 wider than S&P's estimate. Human Genome continues to execute on its plan, with the Phase I start of Albutropin for growth hormone deficiency and the Phase IIb trial of Repifermin for venous ulcers in Q2. The company is expanding manufacturing, and its partners are making progress on the development front. By the end of 2002, S&P expects Human Genome and its partners to have 10 to 12 drugs in clinic. The company is the only biotech firm with a pipeline derived from a fully integrated genomics approach, and S&P feels the positive news flow could drive speculative shares higher.

Whole Foods Market (WFMI): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Phillip Seligman

The retail grocery chain posted June-quarter EPS of $0.29 vs. $0.26, $0.02 above S&P's estimate. Sales rose 21%, beating S&P's expectations, aided by new stores, 10.1% higher comparable-store sales, and higher volume. Gross margin climbed 27 basis points, despite a 15-basis-point rise in utility costs. EBITDA margin fell four basis points on higher wage costs. S&P is keeping the fiscal 2001 (Sept.) EPS estimate at $1.10, assuming higher utility costs in the September quarter. However, S&P is raising the fiscal 2002 estimate by $0.02 to $1.30, assuming sales are up 20%, comparable-store sales rise 8%-plus and the company shows wider EBITDA margin. Whole Foods is doing well amid the slow economy, and S&P considers the shares attractive at 25 times the fiscal 2002 estimate.


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