Markets & Finance

S&P Upgrades Genentech


Moore Corp. (MCL): Initiates with 5 STARS (buy)

Analyst: Michael Santicchia

This major producer of business forms and related items is in the early stage of a major restructuring, led by a seasoned turnaround management team. Cost cutting and refocusing on core business have resulted in expanding margins and strong cash flow generation. Moore's unleveraged balance sheet, and its strong competitive position in a fragmented industry opens opportunities for accretive acquisitions. S&P see 2002 EPS at $0.51 and sees 2003's at $0.80. S&'s break-up and conservative discounted cash flow analyses point to an intrinsic value of $17.

Genentech (DNA): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Frank DiLorenzo

The sharp price drop Thursday has brought Genentech shares to a more reasonable valuation, in S&P's view. For the short term, S&P still feels the growth catalyst for the stock is limited to Rituxan sales. However, long-term (beyond 2003), S&P believes Genentech's pipeline is solid and should support growth into the mid-decade. Using S&P's 2003 estimates, the company's price-earnings-to-growth ratio of 1.6 is still above S&P's biotech peer ratio of 1.4. S&P considers these shares fairly priced on a long-term basis, but feels certain other profitable biotechs are more attractive.

First Data (FDC): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Scott Kessler

First quarter EPS from recurring operations were $0.65 vs. $0.47 without the impact of FAS 142, in line with S&P projection and $0.02 above Street. Revenue from recurring operations rose 8%, better than expected, on a strong 14% rise in merchant services (34% of revenues). Growth of payment instruments (42%) was bit light at 15%. Efficiencies and expense controls contributed to operating margin of 21.1%, nicely above S&P's forecast and above the year ago's margin. S&P sees First Data as a well run company, but views slowing momentum at Western Union as a red flag. First Data is fairly valued at 26 times S&P's 2002 estimate of $3.31.

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

Analyst: Robert Friedman

GE's first ever conference call ended with more questions than answers. Although the industrial/financing/ media behemoth reported a first quarter EPS rise of 17%, to $0.35, before accounting changes, operating cash flow is up only 8%. There still are questions revolving around the potential of gains from restructuring reserve reversals, pension gain components, estimated expenses from 2002 option grants, and order rates at GE's Power Genenation unit, which is currently the only unit driving GE Industrial earnings. S&P's cash flow models value the stock at $35 per share, at best.

Lab Corp. (LH): Upgrades to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Phillip Seligman

Revenues and margins should continue to grow, with genomic/molecular tests increasing as a percent of revenues. Drivers include new diagnostic tests for infectious and noninfectious diseases (like cancer), prognostic tests for patient-specific therapies and the propensity for developing noninfectious disease. Other drivers include active development, licensing and partnering, and acquisitions to gain technologies. The stock should outperform at 25 times S&P's 2002 EPS estimate of $3.90 vs. 25%-plus long-term growth. S&P's discounted cash flow model sees intrinsic value at $120-plus.


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