Markets & Finance

S&P Cuts Power Producers


AES Corp (AES): Downgrades to 1 STAR (sell) from 3 STARS (hold)

Aquila (ILA): Downgrades to 1 STAR (sell) from 3 STARS (hold)

Williams (WMB): Downgrades to 1 STAR (sell) from 2 STARS (avoid)

Analyst: Craig Shere

The collapse of the industry's marketing operations is hurting earnings and share prices at time of renewed credit concerns and new planned equity issuances. S&P sees increasing difficulty and dilution relating to plans by both companies to issue new equity. S&P says AES has a sizable exposure to the troubled Latin American countriesm, and doubts the company can sell off such high risk assets in this environment.

Citigroup (C): Reiterates 5 STARS (buy)

Analyst: Catherine Seifert, Stephen Biggar

Shares are off about 7% amid fears over Citigroup's loan exposure to Worldcom WCOM. S&P is placing the 2002 estimate of $3.25 a share under review pending verification of Citigroup's exposure to the estimated $30 billion in total WorldCom debt. However, given Citigroup's diversified $391 billion loan portfolio (at year end 2001), it is unlikely that this will have a significant impact on 2002 earnings per share. S&P is concerned about the longer range impact from this debacle, but remains positive on Citigroup's longer term prospects.

Sun Microsystems (SUNW): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Megan Graham Hackett

Shares are expected to continue to be under pressure from growing concerns that weak information technology spending could impact Sun's revenues through most of calendar year 2002. S&P is making no change to its estimates because it had not factored in the relief to gross margin from better component pricing. S&P thinks shares could trade only in line with the market as Sun's attractive valuation is offset by a poor market psychology. With $6 billion in cash and key new leading-edge technologies coming to market, S&P believes Sun is worth holding.

WorldCom (WCOM): Dropping Coverage

Analyst: Todd Rosenbluth

The shares of the troubled telecom carrier should open sharply lower after WorldCom said its EBITDA for 2001 and the first quarter of 2002 will be restated. The company improperly booked a total of $3.85 billion in line cost expenses as capital expenditures. Despite a change in its CFO, S&P believes that the announcement, coupled with a challenging operating environment, is too severe for a new management team to overcome. S&P recently had an avoid recommendation on the shares.

RealNetworks (RNWK): Downgrades to 3 STARS (hold) from 3 STARS (hold)

Analyst: Scott Kessler

The stock has fallen in the past week on a negative June 20 Nielsen/NetRatings report suggesting RealNetworks' media format isn't as pervasive as once thought, and has been losing share to Microsoft. The company is transitioning its business model focus from software licenses to consumer subscriptions, and has less exposure to media-player wars than in prior years. However, S&P still expects 49% of 2002 sales from software licenses. With tech spending still limited, S&P also thinks a more prudent stance on RealNetworks is warranted, even with March 2002 cash and securities of $2.55 a share.


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