Markets & Finance

S&P Cuts Xerox to Avoid


Xerox (XRX): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Richard Stice

Shares opened sharply lower Friday morning on a Wall Street Journal story indicating more Xerox revenue was improperly recorded than previously discovered via a SEC investigation. The number may actually have exceeded $6 billion over five years, compared with earlier estimates of $3 billion over four years. S&P says the news is disappointing, given the belief that the company had been making measurable progress in improving its balance sheet, restructuring operations and introducing new products. But given the latest revelation, S&P advises placing funds elsewhere.

P.F. Chang's China Bistro (PFCB): Maintains 4 STARS (accumulate)

Analyst: Marcos Kaminis

With the manageable and selective expansion of the Bistro, supported by the launch of the Pei Wei Asian Diner concept, S&P forecasts a 28% CAGR for revenues and a 30% CAGR for earnings per share over the next two years. S&P sees EPS of $0.80 in 2002 and $1.04 in 2003. S&P's valuation of projected free cash flow from operations indicates a current intrinsic value of $33-$34. Based on the valuation of the cash flows one year forward, the12-month price target is $36 or 10% above the current market value.

NVIDIA (NVDA): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Thomas Smith

With revenue slowdowns at other chipmakers serving the PC markets, S&P believes growth will moderate for the leading graphics processor maker. S&P is lowering the fiscal 2003 (Jan.) EPS estimate to $1.78 from $1.90, and is cutting fiscal 2004's to $2.00 from $2.30. Additionally, S&P is concerned about the quality of earnings, given that reported fiscal 2002 earnings per share of $1.25 is well above pro forma EPS of $0.69 after considering the options expense under SFAS 123. Although the price-earnings multiple at 8.6 times S&P's fiscal 2004 estimate is about half the market's, NVIDIA's new revenue uncertainty warrants caution.


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