Markets & Finance

Mercury Interactive Cut to Hold


Mercury Interactive (MERQ)

Downgrading from 4 STARS (accumulate) to 3 STARS (hold)

Analyst: Mark Basham

Shares have risen 82% since Sept. 21, but still off 60% year-to-date. Despite market's signals of a steep "V-shaped" recovery, S&P thinks it is prudent to have more conservative expectations for global recovery because of synchronous recession in most major economies. Mercury is expensive at 47 times S&P's 2002 $0.77 EPS estimate, and 36 times $1.01 in 2003. Stock trades at a slight premium to S&P's intrinsic value target of $33-$35 based on a discounted cash flow analysis.

Cymer (CYMI)

Adding to stars with 4 STARS (accumulate)

Analyst: Richard Tortoriello

Cymer is the world's leading maker of excimer lasers, which are used as light sources in semiconductor photolithography. The growth prospects are solid because of obsolescence of older mercury gas light sources. S&P projects 5-year EPS growth rate of over 30%. The company has 80% market share, based on its ability to develop new technologies and ramp them to production volume quickly. S&P sees 2002 EPS of $0.37 and 2003 EPS of $1.53 compared with $0.26 for 2001. At price-to-sales ratio of 2.6 times compared with historical highs of 7.0, Cymer is attractive.

Tesoro Petroleum (TSO)

Initiating coverage with 3 STARS (hold)

Analyst: John Kartsonas

With refineries in the relatively high-margin western U.S., total refining capacity of 390,000 barrels per day, Tesoro is one of the largest independent refiners in the country. S&P look for the company to benefit from increasing demand of refining capacity and lack of new-built refineries. Over the short-term, although oil prices have declined considerably, demand for products (jet fuel, heating oil) remains weak and that means narrower margins. S&P sees 2001 EPS at $2.20, 2002 at $1.12. Shares of Tesoro are trading at 11 times S&P's 2002 estimate, above the group average.

Nokia (NOK)

Maintains 2 STARS (avoid)

Analyst: Ari Bensinger

Based on strong start for Nokia 8310 and brisk sales in the U.S., the company sees Q4 results at upper end or better than previous EPS guidance of EUR 0.18-0.20. Mobile channel inventories are normalizing. It projects 105-110 million handset units will be shipped in Q4. S&P expects 2001 handset market at 380 million units (down 5%) and 2002 at 430-450 million units (15% growth). Sales outlook remains healthy, but S&P believes competitor discounting and rollout of low margin 3G network products will put pressure on operating margins. At over 3 times 2002 sales estimates, shares are trading well above peers.

Georgia-Pacific (GP)

Maintain 2 STARS (avoid)

Analyst: Byron Korutz

The board's has given its approval to open discussions to sell its building products business to Willamette Industries. S&P says it applauds G-P's actions to reduce its dependency on commodity offerings through the possible sale of its building products business. But, its status as a long-time player in the commodity businesses, leaves S&P concerned over its ability to compete with its competitors' marketing efforts in the consumer products area. Also, it's unclear what Willamette's true intentions are, given its desire to fend off a hostile takeover bid from Weyerhaeuser.

Xilinx (XLNX)

Maintains 4 STARS (accumulate)

Analyst: Thomas Smith

The company's mid-quarter update was mildly positive. Revenues for the December quarter are tracking 5% lower compared with the September quarter. The results appear to be slightly better than the 7% sequential decline S&P expected. Gross margin is seen at 53%, better than the 52% S&P estimated. Gradually Xilinx is making progress on inventory normalization. S&P expects inventory days at the company will be near 140 at the end of December, down from 150 at the end of October, but shy of the goal of a range between 70 and 90 days. S&P is raising its pro forma EPS estimates by $0.02 in fiscal 2002 (Mar.) to $0.20, by $0.02 in fiscal 2003 to $0.40. S&P notes that programmable chips are an attractive category and S&P sees outperformance in the coming upcycle.


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