Markets & Finance

Sell El Paso


El Paso (EP): Downgrades to 1 STAR (sell) from 4 STARS (accumulate)

Analyst: Craig Shere

Shares are off 21% as El Paso announced big operating shortfalls in Brazil power and oil processing and decides to significantly curtail energy marketing operations and issue additional equity (estimated over 10% dilution). S&P is lowering the earnings per share estimate for 2002 to $2.70 from $3.35, and is lowering 2003's to $2.80 from $3.75. Shares are at 15 times the free cash flow (using maintenance capital expenditures) that is growing in the mid-single digits. Given the pending equity issue and rising exposure to gas price changes, S&P sees potential for shares to reach 12 to 13 times the free cash flow.

Halliburton (HAL): Reiterates 1 STAR (sell)

Analyst: Tina Vital

Shares are down 6%. The company says the SEC has started an investigation into its accounting of cost over-runs on construction jobs. The formal request for documents/subpoena was expected. Halliburton believes it has complied with GAAP. While the company has recently settled 30 asbestos claims, a court has extended its stay on certain asbestos claims against its subsidiary Dresser. Halliburton plans to separate its oilfield services and construction units. S&P still sees Halliburton's asbestos liability difficult to manage or quantify.

Toll Brothers (TOL): Maintains 3 STARS (hold)

Analyst: Michael Jaffe

The company posted April quarter earnings per share of $0.69 vs. $0.58, more than expected. The gains reflected 8% more closings (11% on unit basis), and well-controlled building costs. The company also had a strong 30% gain (19%) in home orders. The company left its backlog up 5% (10%). S&P is hiking the fiscal 2002 (Oct.) estimate to $2.85 from $2.75, and is upping fiscal 2003's to $3.00 from $2.90. Toll's business is solid, but S&P thinks that a likely modest rise in mortgage rates over the next year could limit demand for its luxury homes. At 11 times the fiscal 2002 estimate, shares are in the middle a of historical P/E range. When paired with likely investor jitters over interest rates, this leaves S&P neutral.


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