Markets & Finance

S&P Downgrades Capital One to Accumulate


Capital One Financial (COF): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Robert McMillan

Even though Capital One raised its 2002 guidance to $3.79 on Tuesday, shares are down sharply Wednesday on news that the company may enter into a Memoradum of Understanding with regulators to address supervisory matters. Capital One has addressed several of the issues raised by regulators and has already boosted reserves for subprime loans.

Moreover, increased regulatory efforts are not surprising after debacles at several subprime lenders. Even though Capital One is attractively valued relative to long-term fundamentals, S&P thinks the less aggressive stance is warranted.

Teradyne (TER): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Richard Tortoriello

The maker of electronic test systems posted a second quarter loss per share of $0.28 vs. loss of $0.23 -- $0.02 better than the Street's mean. Sales fell 15% from a year ago but rose 25% from the first quarter. Orders rose 9% from the first quarter. However, the slowdown in order growth from 65% in the first quarter indicates modest revenue growth in the second half of the year. S&P is are widening its 2002 loss per share estimate to $1.17 from $1.06, and is reducing the 2003 earnings per share estimate to $0.48, from $0.62.

S&P sees a risk in buying Teradyne's stock. The company's earnings do not include significant employee stock options expenses, which were $0.42 per share in 2001.

Metris Companies (MXT): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Robert McMillan

The consumer credit provider posted a loss per share of $0.74 vs. EPS of $0.63 -- sharply below estimates. Results were hurt by lower net interest income and credit card fees, a loss from securitizations and higher card servicing income, and higher costs. Net interest margins were 14% vs. 14.1%.

Credit quality deteriorated with the managed net chargeoff rate rising to 15% from 10.9%. S&P is reviewing its projections. Given Metris's focus on high-risk consumers, who are adversely affected by the weak economy, and the likely increase in regulatory oversight, S&P sees the stock underperforming.

Barra (BARZ): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Mark Basham

S&P thinks the business software company's efforts to refresh its existing product line and launch new products for new markets will be frustrated over the short term by continued weakness in financial markets. Barra will manage a core software unit for flat revenues in flat 2003 (Mar.), while using its $243 million in cash to buy back shares.

S&P is trimming the fiscal 2003 estimate to $1.88 from $1.96, and is trimming fiscal 2004's to $2.20 from $2.30. While Barra is undervalued and has an excellent long term outlook, the lack of a short term growth catalyst tempers S&P's enthusiam.

Whirlpool (WHR): Removes from "Top Ten" portfolio; now rated 3 STARS (hold)

Analyst: Robert Gold

S&P is removing Whirlpool from its "Top Ten" portfolio and adding Procter & Gamble (PG), a move that S&P says reflects the potential for slowing home appliance sales and difficult year-over-year comparisons in the second half of 2002.

S&P has also lowered its investment opinion on Whirlpool, downgrading the home appliance maker to 3 STARS (hold). S&P sees $6.00 EPS for 2002 and placing its 2003 estimates under review.

P&G, which S&P ranks as a 5 STARS (buy) stock, stands to benefit from foreign exchange tailwinds and improved volume and margin trends. S&P views the recent price decline as a buying opportunity, and maintains its 12-month target of $100.


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