): Maintains 1 STAR (sell)
Analyst: Thomas Rosenbluth
This afternoon, Moody's put the long-term ratings on $52 billion of Verizon debt under review for a potential downgrade from the A1 level. S&P is concerned about expanding competition and technology substitution on Verizon's operations, as well as the sustainability of cash flow growth relative to its large debt level. The review follows downgrades of other debt-laden carriers. S&P shares the rating agency's worries, believing EBITDA margins will narrow on reduced wholesale rates. Shares are trading at a higher 2002 enterprise value/free cash flow ratio than similarly weak Bell peers.
Bristol-Myers Squibb (BMY
) and GlaxoSmithkline (GSK
): Reiterates 3 STARS (hold)
Analyst: Herman Saftas
The rationale of a merger between the two comapanies would be huge cost savings and synergies needed to shore up earnings in the face of major patent expirations at both firms. However, S&P views the merger possibility as improbable. the combination would not do much for top-line growth, since both have relatively thin pipelines. The merger of U.K.-based GlaxoSmithkline and U.S.'s Bristol-Myers would also pose regulatory hurdles. Both companies are adequately valued at present levels, based on near-term earnings per share prospects.
): Initiates with 3 STARS (hold)
Analyst: Scott Kessler
The leading provider of e-mail payment solutions for individuals and businesses came public in February and posted a first quarter profit. S&P expects 2002 sales up 117% on continued strong momentum in registered accounts and payment volume PayPal has about a 72% penetration in eBay auctions; pursuing fixed-price and e-mail marketing opportunities. S&P projects the company's business model will continue to scale, and sees operating margin improvement from 1% in the first quarter to 13% in the fourth quarter. But at 73 times the 2002 estimate, and with notable competitive and regulatory risks, S&P rates PayPal as hold.
Wendy's International (WEN
): Reiterates 4 STARS (accumulate)
Analyst: Dennis Milton
The company announced it has agreed to acquire Fresh Enterprises, Inc., the operator of Baja Fresh Mexican Grill restaurant chain, for $275 million. Baja Fresh operates and franchises 169 fast-casual restaurants in 16 states and the District of Columbia. The acquisition is expected to be dilutive by $0.02 to $0.04 in both 2002 and 2003, and accretive in 2004 and thereafter. Wendy's maintains its 2002 earnings per share outlook of $1.85 to $1.90 based on stronger than expected sales performance at Wendy's and Tim Horton's restaurants. S&P is maintaining the 2002 EPS estimate of $1.90.
Dollar General (DG
): Maintains 3 STARS (hold)
Analyst: Karen Sack
The first quarter was better than expected. Dollar General posted $0.14 vs. $0.11. on a 6.7% rise in same-store sales and 535 new stores. Operating margin rose 20%, boosted by higher initial markups, and was partly offset by increased labor costs. Dollar General is adding staff and S&P expects selling, general and administrative expenses to continue to rise in the second quarter. But sales are benefiting. The SEC probe into accounting issues, including possible fraud, remain a cloud over the company. S&P is keeping the $0.77 fiscal 2003 (Jan.) EPS estimate on a 5%-7% increase in same-store sales and 600 new stores. Dollar General is fairly valued at 23 times S&P's fiscal 2003 earnings per share estimate.