Markets & Finance

S&P Says Buy Boeing


Boeing (BA): Reiterates 5 STARS (buy)

Analyst: Robert Friedman

S&P says still buy the aircraft manufacturer, despite reports that Boeing may lose a $3 billion jet order from Taiwan's second-largest airline. The fallout from September 11 continues to take a toll on trans-Pacific travel, forcing Taiwan's EVA Air to consider canceling orders to buy seven 777's. Despite this high-profile cancellation, S&P is not changing its conservative 3% long-term free cash EPS CAGR assumptions, as the potential for large near-term order cutbacks and mediocre aerospace economics is already baked into projections. The value gap has narrowed considerably over the last five months, but S&P still calculateS Boeing at a 10% discount to fair value.

Eastman Kodak (EK): Downgrades to 1 STAR (sell) from 2 STARS (avoid)

Analyst: Richard Stice

The company continues to be negatively impacted by weak near-term product demand, pricing pressures and eroding market share. The recent departure of Kodak's president/COO adds to the uncertainty. Digital operations are not expected to be profitable until 2003, at which time may begin to cannibalize Kodak's traditional film product line. Also, S&P sees the possibility of negative pre-announcements in 2002, and believes Kodak's turnaround assumptions are too aggressive. S&P is keeping the 2002 EPS estimate at $2.05, below Kodak's $2.30 EPS expectations.

Walgreen (WAG): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Joseph Agnese

The company reported February sales increased 18.6% and comparable store sales rose 12%. Strong pharmacy business continues to resist the economic downturn with comp sales rising 17.2%. Front-end sales appear to be improving with comp sales up 5.1%, better than expected. Despite gross margin pressure from a change in sales mix, S&P is raising the fiscal 2002 (Aug.) EPS estimate to $1.03, from $0.99, to reflect better front-end performance. With plans for 475 new stores on track for fiscal 2002, S&P feels the higher valuation is justified for this industry leader.

Oracle (ORCL): Reiterates 4 STARS (accumulate)

Analyst: Jonathan Rudy

Oracle stated that revenue and earnings growth for fiscal Q3 will be roughly the same as Q2, and will lead to fiscal Q3 EPS of $0.09 -- a penny below S&P's estimate. Asia Pacific is cited as a main area of weakness. S&P is lowering the fiscal 2002 and 2003 EPS estimates to $0.42 and $0.51. While disappointed with news,S&P believes that this slight shortfall does not warrant the sharp pre-market sell-off. At 28 times the fiscal 2003 EPS estimate, with a return on equity over 40%, mid-30% operating margins, and about $5 billion in cash and investments, S&P would accumulate this market leader.

Northrop Grumman (NOC): Maintains 3 STARS (hold)

Analyst: Robert Friedman

By launching a $47 per share hostile bid for TRW, Northrop is trying to acquire military missiles/electronics and auto parts maker on the cheap. S&P doesn't think TRW shareholders will allow the world's #3 military weapons maker to buy TRW at alow 8 times its free-cash EPS. S&P thinks Northrop will need to pay at least 10 times the free-cash EPS, or $58 per share. Even if Northrop wins, the marriage would only combine two mediocre generators of free cash EPS and return on equtiy. Athough Northrop is overvalued, the premium is not high enough to consider a downgrade.


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