Markets & Finance

Still Buy Costco


Costco Wholesale (COST): Maintains 5 STARS (buy)

Analyst: Karen Sack

The company's fiscal third quarter earnings per share results were better than expected, rising 22% to $0.28 on a 6% same-store sales gain. Wider gross margin was offset by increased selling, general and administrative (SG&A) expenses. Operating income rose 21%. Costco is adding 29 new units in fiscal 2003 (Aug.) and is relocating six units.

S&P expects gross margins to widen slightly and for SG&A expenses to improve. S&P also sees EPS advancing 16% in fiscal 2003 and is raising its estimate by $0.03 to $1.70. Marketshare gains and maturation of new units bode well for continued EPS gains of 16% annually in the next few years. S&P's target price over the next 12 months is $54.

Cirrus Logic (CRUS): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Megan Graham Hackett

The recent sell off in semiconductor names has brought Cirrus shares' valuation more in line with peers on a price-to-sales basis. Shares currently are trading at price-to-sales ratio of two times S&P's calendar 2002 revenue estimate, which is viewed as reasonable, given Cirrus's position in the electronic home entertainment market.

Neiman Marcus (NMG.A): Maintains 3 STARS (hold)

Analyst: Karen Sack

Third quarter earnings per share were in line with estimates, rising 22% to $0.98, before one-time items. Same store sales fell only 1.9%, which was better than S&P expected. Also, good inventory controls and better sell-through of full-price merchandise boosted operating income by 21%. Reflecting a modestly improving environment for luxury retailers as well as easy comparisons in the second half, S&P is raising the fiscal 2002 (July) EPS estimate by $0.04 to $1.93, before one-time items, and is upping the fiscal 2003 estimate by $0.30 to $2.50. But S&P sees shares as fairly valued at 14.4 times the fiscal 2003 EPS estimate and 0.6 times sales.

Philip Morris (MO): Maintains 4 STARS (accumulate)

Analyst: Richard Joy

The company agreed to sell its Miller Brewing business to South African Breweries PLC for $5.6 billion, creating the second largest brewer in the world. The deal fairly values Miller at about 9.3 times the trailing EBITDA. Philip Morris is retaining a 36% equity interest in the new company. S&P views the deal positively, as the company's strengthened balance sheet is funding accelerated share repurchases and food/tobacco acquisitions. S&P is keeping the 2002 and 2003 earnings per share estimates at $4.86 and $5.45, respectively. Shares are attractive at 11.5 times S&P's 2002 EPS estimate, given solid operating results and a 4.1% dividend yield.

Microsoft (MSFT): Maintains 4 STARS (accumulate)

Analyst: Jonathan Rudy

According to Thursday's Wall St. Journal, Microsoft is in talks with the SEC to resolve allegations that the company understated results in order to steady revenue and earnings growth. It appears likely that the company will face civil charges, and have to agree to abide by SEC rules rather than face a fine. S&P believes that concern over Microsoft being too conservative is not a significant issue over the long-term. Based on S&P's discounted cash flow analysis, Microsoft is attractively priced at a notable discount to intrinsic value.

Fannie Mae (FNM) and Freddie Mac (FRE) : Maintains 3 STARS (hold)

Analyst: Erik Eisenstein

The White House seems to be weighing in on the side of a recent Congressional proposal to eliminate disclosure exemptions for government sponsored enterprises (GSEs). Fannie Mae and Freddie Mac have argued that forcing registration of all mortgage- backed securities would impede the secondary mortgage market. S&P says it seems like just another foray in a political battle that is far from over. For now, S&P thinks GSEs will continue to successfully defend themselves.


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