Markets & Finance

S&P Says Buy Barnes & Noble amid Stronger Sales


Barnes & Noble (BKS): Maintains 5 STARS (buy)

Analyst: William Donald

The book and multimedia seller confirmed consolidated fiscal 2002 (Jan.) EPS of $1.28. The company expects a 46% surge in fiscal 2003 EPS to $1.87, but S&P believes $1.95 is possible. S&P also expects retail bookstores to earn $1.86, which is $0.08 more than B&N expects, vs. fiscal 2002's

$1.59. S&P says look for a fourth quarter sales boost next year from a new Harry Potter title and better profit margins than expected. The company expects its share of GameStop profits to triple to $0.33. Also, B&N sees a 34% drop in its share of online loses to $0.23 from $0.35. Other equity losses are down to $0.01 from $0.07. S&P says shares are undervalued vs. the $40 12-month target.

Patina Oil & Gas (POG): Adding to coverage with 4 STARS (accumulate)

Analyst: James Kartsonas

With exploration and production operations in Colorado's Denver Wattenberg field and proven reserves of 720 Bcfe (73% gas), S&P looks for Patina to accelerate its acquisition program in 2002, although production should decline slightly. The company's hedges (about one-third of 2002 production) and low debt levels (a debt to capital ratio of 19%) are a good combination in the volatile commodity environment. S&P sees 2002 EPS at $1.95, and sees the 2003 EPS at $2.43. PAtina is trading 10% below S&P's calculation of net asset value, at an enterprise value to reserves (barrel) of $6.10 -- below peer average.

General Electric (GE): Maintains 3 STARS (hold)

Analyst: Robert Friedman

Bill Gross, a highly respected bond fund manager, seriously questioned GE's capital structure and long-term historical 15% annual EPS growth rates in his newsletter and on CNBC. S&P strongly agrees with Gross's contention that GE's EPS growth chiefly is powered by myriad acquisitions funded by richly valued stock or cheap commercial paper. Also, S&P concurs with his seeming contention that the game eventually will end. S&P continues to project GE will grow EPS at 9% at best, not at the consensus 15%. The stock is at the low end of fair value range.

Hughes Electronics (GMH): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Howard Choe

The company said it would exceed its previous guidance of net new subscribers in Q1 (200,000 to 250,000), adding over 325,000 subscribers. This is great news, but S&P is concerned that despite overachieving target subscriber additions by 44%, the company expects no improvement in EBITDA. S&P attributes the lack of EBITDA improvement to much higher advertising and promotions levels that may need to be sustained going forward. Hughese also announced a deal with Worldcom to expand digital subscriber lines nationwide, underscoring the need to fill a void in high-speed data.

PeopleSoft (PSFT): Maintains 3 STARS (hold)

Analyst: Jonathan Rudy

An article in today's Wall Street Journal rehashed questions regarding PeopleSoft's Momentum subsidiary as a means of diverting product development expenses. While this is acceptable under new general accounting practices, the move likely benefited PeopleSoft's bottom line during the upgrade cycle to PeopleSoft 8. The company is reacquiring Momentum for $90 million in cash. S&P would be more cautious on PeopleSoft's sustainable levels of profitability. However, PeopleSoft 8 has been very successful in diversifying PeopleSoft into customer relationship management and supply chain management categories. With $1.6 billion cash and investments and little debt, S&P says its O.K. to hold PeopleSoft.

Hewlett-Packard (HWP) and Compaq Computer (CPQ): Maintains 3 STARS (hold)

Analyst: Megan Graham Hackett

On Wednesday Compaq shareholders approved a merger with Hewlett-Packard, as expected. Neither company updated the status of when the H-P vote would be certified, but S&P still believes the merger was approved by H-P shareholders by a slight margin. The next key milestone after the certification of the H-P vote is the announcement of surviving product lines and of product roadmap, which is expected sometime in April. S&P currently estimates that the new company could earn $1.38 in fiscal 2003 (Oct.), below the company's guidance of $1.51. While S&P sees EPS at risk, at a low price-to-share ratio 0.7 times, S&P recommends investors hold the shares.


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