Markets & Finance

S&P Upgrades Harrah's Entertainment to Accumulate


Harrah's Entertainment (HET): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Thomas Graves

Before nonrecurring items, first quarter earnings per share were $0.74 vs. pro forma $0.47, much above analysts' estimates. S&P is raising the 2002 estimate to $2.84, from $2.33, and looks for $3.16 in 2003. S&P also sees the company benefiting from a customer loyalty program. The stock is up sharply Wednesday. However, S&P doesn't view the stock as especially cheap at the current enterprise value of about 8.5 times the estimated 2002 EBITDA, and 8.0 times the estimated 2003 EBITDA. But S&P expects higher profit estimates to help shares rise in the near-term. The stock is at about 12.9 times the estimated 2002 after-tax free cash flow (after maintenance capital expenditures.).

Harley-Davidson (HDI): Maintains 4 STARS (accumulate)

Analyst: William Donald

The company posted $0.39 first quarter earnings per share up 30% vs. $0.30, beating the Street's consensus by $0.03. Revenues jumped 19.4%, and gross margin rose to 34.0, vs. 32.7, helped by more workdays, a stronger product mix, and a greater share of U.S. shipments. Demand for Harley-Davidson bikes exceeds supply. The company is raising its 2002 production target to 261,000 units from the previous 258,000 target, but S&P sees 268,000, and is looking for a 20% jump in net income for 2002, as well as a 21% EPS gain to $1.72. Harley-Davidson's premium of 31 times the price-to-earnings multiple is warranted, based on prospects for average EPS gains in the high teens/low 20s over the next five years, and the near-cult status of Harley-Davidson bikes.

Airgas (ARG): Downgrades to 1 STAR (sell) from 3 STARS (hold)

Analyst: Richard O'Reilly

The company is the largest distributor of packaged industrial gases selling at a higher price-earnings multiple vs. domestic gases makers. The stock has more than tripled from mid-2000. S&P sees fiscal 2003 (March) at $0.90, including a modest benefit of the recent purchase of Air Products' U.S. packaged gas unit, vs. $0.78 expected for fiscal 2002. The acquisition expanded annual sales by about 14% and shifts Airgas' sales mix more to better margin gases/rent business. But with packaged gases overall margins below those of producers of gases, S&P thinks Airgas shares are expensive.

RF Micro Devices (RFMD): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Thomas Smith

The company reported fourth quarter fiscal 2002 (March) earnings per share of $0.02, vs. a $0.04 loss -- a penny above estimates. Revenue rose 83% year over year, but was flat quarter over quarter. The results beat the usual seasonal dip as components for handsets and wireless local area networks (LAN) sold better than expected. Gross margin widened 210 basis points to 40.8%. The company guided June quarter revenue up 7-10% sequentially. Market share gains imply growth potential faster than the wireless handset market (10-20% annually). The high debt/equity (75%) signals some risk amid a strong sales opportunity. At 58 times S&P's $0.36 calendar 2003 EPS estimate, the valuation is high vs. peers.

Advent Software (ADVS): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Michael Santicchia

The company posted first quarter earnings per share of $0.23 -- one penny below S&P's estimate. Although revenues were 3% higher than S&P's forecast and gross margins were robust at 82.4%, higher than expected operating estimates hurt operating margins which came at 19%, below S&P's estimate of 20.5%. Higher interest income helped the bottom line. S&P is lowering the EPS estimates for the second quarter from $0.33 to $0.31 and full 2002 from $1.33 to $1.30, reflecting lower top-line contribution from the Xinexus acquisition. At 43 times the 2002 estimate, shares are expensive.

Household International (HI): Maintains 4 STARS (accumulate)

Analyst: Robert McMillan

The company posted earnings per share of $1.09 vs. $0.91, well above expectations. Net revenues rose 19% on higher net interest margin, fee income, and receivables volume. Household's managed loan portfolio increased 14.5% to $101.2 billion. Credit quality remained sound, although its managed net charge-off rate rose to 4.09%, from 3.9% in the fourth quarter. S&P is reviewing its estimates, and thinks shares, trading at 12.8 times the Street's 2002 EPS estimae of $4.65, remain attractive, given Household's solid franchise, growth potential and relative discount to the S&P 500.


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