Markets & Finance

Still Buy PepsiCo, Quaker Oats


PepsiCo (VSH) and Quaker Oats (OAT): Reiterates 5 STARS (buy) on both

Analysts: Phillip Seligman, Richard Joy

As S&P expected, FTC ultimately approved PepsiCo's acquisition of Quaker Oats. A protracted court battle was avoided. S&P views combined entity as formidable force in relatively fast-growing, high-margin snacks and beverages markets. S&P continues to believe there are many benefits of the combination, including critical scale to exploit international opportunit and increased clout with retailers and foodservice customers. PepsiCo's weakness today offers new investors a favorable entry point.

Vishay Intertechnology (VSH): Upgrades to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Thomas Smith

The component maker posted Q2 EPS of $0.28 (before $0.26 restructuring charges and a raw material writedown) vs. $0.96, topping the $0.25 consensus. S&P thinks this is good performance in the heart of a cyclical industry downturn. Shipments are apt to run lower in Q3 than Q2, but the turn in business likely is within S&P's six-to 12-month time frame. Valuation has seen cycle lows, in S&P's view. The acquisition of General Semiconductor announced Wednesday broadens the line, and is immediately accretive. Vishay has no long-term debt and has ample $450 million in cash. At 2.2 times the tangible book, valuation is very attractive.

Quanta Services (PWR): Downgrades to 3 STARS (hold) from 5 STARS (buy)

Analyst: Mark Basham

S&P cut the electrical contractor's already-reduced 2001 second-half revenue guidance by another 15%, and cut the EPS from $1.73-$1.77 to $1.36-$1.39. S&P says it's hard to believe this weakening in bookings only became apparent since June 14, when management last discussed their outlook. With the company's credibility severely damaged, S&P expects the stock to fall to the low end of valuation range of 13 times forward EPS, which implies a downside Wednesday to about $20. In the absence of a clear economic upturn, S&P sees little that will make shares better than a market performer into 2002.

Fluor (FLR): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Stewart Scharf

The engineering and construction firm posted $0.45 Q2 EPS before $0.02 charges, in line with expectations, but issued a Q3 and 2001 EPS warning, citing the weak economy and a $0.08 2001 dilution from an options exercise. Fluor is shifting to longer-term power and energy projects, which increases the lag time to recognize earnings. The company also is also reducing its investment level and reviewing non-strategic activities. Q2 new project awards are up 12%, and margins are improving, but with soft markets impacting results into 2002, S&P is cutting the 2001 estimate by $0.15 to $1.85, and is trimming 2002's estimate by $0.25 to $2.10. At 19 times S&P's 2002 estimate and with 14% EPS growth, S&P suggests holding until the markets recover.

Got questions on hotel and gaming stocks? Entertainment firms and electronics retailers? S&P analyst Thomas Graves, who follows those groups, will answer selected queries from BW Online readers on our Aug. 3 Ask the Analyst video. Send your questions for Tom to ask_analyst@businessweek.com


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