Markets & Finance

Still Hold Home Depot


Home Depot (HD): Still 3 STARS (hold)

Analyst: Maureen Carini

The home-improvement retailer reported first quarter EPS of $0.36 vs. $0.27, better than expected. Same-store sales grew 5%, aided by gains in large-ticket items and favorable weather. Margins continued to expand on improved sales mix, increased store productivity, and sharp control of costs. Balance sheet was strong with $5.2 billion in cash and little debt, with return on invested capital of 19.2%. We at S&P are raising our fiscal year 2003 (Jan.) EPS estimate by $0.05, to $1.55. We remain optimistic about the estimate of 3-year annual EPS growth 18%-20%. However, we view the shares fairly valued at 29 times our fiscal year 2003 estimate.

Broadwing (BRW): Downgrading to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Todd Rosenbluth

The shares were down sharply this morning on accounting and liquidity concerns. In its recent 10-Q filing, BRW disclosed that first quarter revenue was higher on the renegotiation of long-term capacity sales transactions with bankrupt customer PSINet. The contract life was shortened. Unlike its peer Qwest, BRW is not currently under investigation for aggressive accounting. However, with investor fears likely weighing on the shares over the short term, and with weak operating environment and higher cost of capital persisting for long-distance providers, BRW shares are unattractive.

Merrill Lynch (MER): Still 4 STARS (accumulate)

Analyst: Robert McMillan

Merrill Lynch announces details of its agreement with the New York State Attorney General. The agreement includes significant new policies to insulate securities research analysts from "any real or perceived undue influence from its investment banking division," and analyst compensation will be tied to investment performance and overall profitability of firm. MER will establish a research recommendation committee to enhance the integrity of its research. MER will pay a $100 million fine but admits no wrong-doing. We at S&P are reviewing our EPS estimates. The deal should help lift doubt on the quality of research.

Qualcomm (QCOM): Still 5 STARS (buy)

Analyst: Ari Bensinger

Reaffirms June quarter EPS guidance of $0.21-$0.23. The company expects volume of 15-16 million MSM phone chipsets, including 10 million CDMA2000 1X chips. With the shift to higher-margin next-generation chips, we see June quarter operating margin over 40%, well above peers. The company reaffirms 2002 CDMA phone market at 80-85 million units, despite the recent government crackdown on illegal subsidies in Korea. We view QCOM as best positioned to benefit from the inevitable transition to broadband wireless networks. QCOM is attractive at a p-e-to-growth ratio of 1.3 times, based on our $0.93 fiscal year 2002 (September) EPS estimate.


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