): Upgrades to 3 STARS (hold) from 2 STARS (avoid)
Analyst: Dennis Milton
Shares of the company have fallen more than 25% from their May highs. Trading at 48 times S&P's fiscal 2003 (Jan.) EPS estimate of $0.64, S&P believes the company's share price now more accurately reflects its growth prospects. The cash flow model, which assumes high, but declining growth rates over the next several years, values the shares at $32-$34. Store openings and strong same-store sales growth should continue to drive strong EPS growth of over 40% in fiscal 2003. S&P recommends holding current positions.
KB Home (KBH
): Upgrades to 5 STARS (buy) from 3 STARS (hold)
Analyst: Michael Jaffe
The company posted May quarter EPS of $1.42 vs. $1.07 --and blew out all forecasts. The rise reflected modest gains in closings and sales prices, and the benefits of preselling and healthier mortgage banking profits. S&P is hiking the fiscal 2003 (November) estimate to $6.50 from $5.70, and is upping fiscal 2003's to $7.10 from $5.90. May quarter orders fell 2% on 7% less communities, but orders rose 20% so far in June and community count will climb during rest of year. At 7 times the fiscal 2003 estimate, shares trade a bit below group. Possible rate jitters make S&P cautious, but with housing strength likely to go on longer than expected, S&P is more positive on KB.
Home Depot (HD
): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)
Analyst: Tuna Amobi
The stock is down 26% year to date, much more than peers and market. At a William Blair Growth Stock forum, Home Depot reaffirmed its 2%-4% comp-store gains and $0.47 EPS guidance for the July quarter. S&P sees 15%-18% and 18%-20% long term sales and EPS growth, aided by merchandising and productivity steps. A CEO interview in The Wall Street Journal reiterates trimmed new stores targets. The stock is up Tuesday on strong homes sales, despite a drop in consumer confidence. Home Depot is attractive on industry fundamentals and a $42-$44 intrinsic value of discounted cash flows.
): Reiterates 3 STARS (hold)
Analyst: Richard O'Reilly
DuPont now sees second quarter operating earnings per share of $0.64-$0.67, up from the previous estimate of about $0.55 and versus a year ago's $0.41. The company says the improved outlook reflects higher sales across most of its segments. This would be in contrast to the first quarter, when sales fell 8% from the year earlier. S&P believes the bulk of the sales improvement is from volume gains. The earnings per share rise also reflects lower interest expense and better pharmaceutical profits. S&P is raising the 2002 EPS estimate to $1.85 from $1.75, vs. 2001's $1.19. At 24 times the 2002 estimate, S&P says hold DuPont for a cyclical recovery.
Cytyc Corp. (CYTC
): Reiterates 3 STARS (hold)
Analyst: Robert Gold
The FTC says it will block the company's Digene purchase, prompting Cytyc to sharply lower its 2002 guidance. The FTC action is curious, given the likely emergence of Roche in HPV testing, but seems focused on the immediate competitive impact in cervical cancer testing and the assumption that HPV will emerge as a primary detection tool. Regarding 2002 sales and earnings per share, Cytyc appears to have limited visibility on ThinPrep end-user demand, and lowered its ductal lavage expectations. It sees 2002 revenues of about $230-$245 million, and EPS (before charges) of $0.40-$0.44. S&P is lowering the sales estimate to $225 million and cutting the EPS to $0.35.
Checkpoint Systems (CKP
): Downgrades to sell from accumulate
Analyst: James Sanders
The company announced Monday that its CEO is resigning in July and would be replaced in the interim by a current board member. This action comes on the heels of an adverse verdict finding Checkpoint guilty of antitrust violations, which was appealed. Regardless, S&P believes that these circumstances present significant operating challenges for Checkpoitn in the near-term. In addition, S&P's intrinsic valuation model, which assumes a return on equity of 10%-12%, indicates that shares are trading at a premium. As a result, S&P would sell Checkpoint.