Markets & Finance

Still Hold Tyco


Tyco International (TYC): Maintains 3 STARS (hold)

Analyst: Michael Jaffe

The conglomerate held an upbeat business update call. Tyco said its businesses were working through the problems seen in the past quarter as a result of business model uncertainties. This leaves the company comfortable with last month's $2.60-$2.70 EPS guidance, especially with its Electronics business seeming to have finally bottomed. We still see $2.70 fiscal 2002 (ending September) EPS, rising to $2.90 in fiscal 2003. Tyco also sees no coming cash crunch, even without the expected monetization of its finance business. The shares look cheap at 7 times our fiscal 2003 estimate, but we would still wait for Tyco's situation to calm down before adding to stakes.

GTECH (GTK): Downgraded to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Thomas Graves

The stock is up close to 30% from its April low. Also, it is within 10% of the price ($66) which could lead to conversion of low-cost debt into stock. We still estimate $3.40 EPS in fiscal 2003 (ending February) but we are lowering our fiscal 2004 estimate to $3.50, from $3.75 with expectation of dilutive debt conversion in early 2003. We still see the company as an attractive cash flow story. Over time, we expect GTECH to benefit if countries and states look more to lotteries for revenue. Also, the prospect of more non-lottery business for the company could help the stock. A 2-for-1 stock split is planned.

Intuit (INTU): Reiterates 5 STARS (buy)

Analyst: Scott Kessler

Our recommendation is based on Intuit's great April quarter. Without amortization and gains on investment sales and divestitures, the company posted EPS of $0.75 (with a charge for vacant facilities) vs. $0.57, above the Wall Street consensus estimate by $0.03 and S&P's projection by $0.01. Revenues were up a better-than-expected 28%, driven by solid tax, loans, small business segments. Margins improved for the fifth consecutive quarter on a year-to-year basis, to an outstanding 42.8%. The company's small business opportunity is sized at $18 billion, with QuickBooks Enterprise and emphasis on new verticals. Intuit is a compelling growth/value play at 29 times S&P's fiscal 2003 (ending July) EPS estimate of $1.48.

IBM (IBM): Still 4 STARS (accumulate)

Analyst: Megan Graham-Hackett

The company held its May 15 analyst meeting with its new CEO Sam Palmisano. IBM believes it can return to double-digit EPS growth, driven by its annuity businesses, market share gains and profit improvements in PCs and HDDs. The company said there would be no change to its 2002 guidance. IBM set an optimistic tone, saying it believes the IT market can grow at 2.5 times the rate of GDP growth for 2003 and "beyond." But Big Blue noted that its profits are shifting from PCs and semiconductors to solutions driving business insight. It says it can cut between $1-$2 billion a year in costs. At 21 times our 2002 EPS estimate of $4.00, below the market multiple, IBM is attractive.

ImClone (IMCL): Keeping 3 STARS (hold)

Analyst: Frank DiLorenzo

ImClone reported a Q1 loss per share of $0.41, wider than our $0.22 loss estimate, due to higher R&D costs. German concern Merck KgaA, which has Europe rights to the C225 anti-cancer drug, plans to file for EU approval in first-half of 2003 but will not expand the number of patients in trials. ImClone and Bristol-Myers may include Merck data in a possible 2003 FDA filing -- or they may have to conduct new trials. Data on C225 (Erbitux) will be presented at the American Society of Clinical Oncology next week. While we still feel there is potential for C225, the shares are an appropriate holding only for speculative accounts.


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