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) and Sprint PCS (PCS
): Keep 1 STAR (sell) on FON AND 2 STARS (avoid) on PCS
Analyst: Todd Rosenbluth
Both tracking stocks of Sprint Corp. are recovering this afternoon as the phone carrier announces it has obtained commitments for an unsecured new $1.5 billion bank facility. Sprint expects to finalize the loan within the next few weeks, dispelling some of last week's liquidity fears. We had been unsure whether the loan would need to be secured. Even so, Sprint, which has a BBB- debt rating, faces operational challenges in both businesses. With weak industry trends, our outlook remains negative on both stocks. ImClone Systems (IMCL
): Upgrading to 3 STARS (hold) from 2 STARS (avoid)
Analyst: Frank DiLorenzo
The shares remain down sharply, despite the biotech rally. News about prosecutor demand for ex-CEO Sam Waksal to serve several years in prison is hitting the stock, but should not have an impact on Erbitux prospects, in our view. While the potential approval of Erbitux is still questionable, we feel any positive news developments on the drug would provide some upside. With about $400 million in cash, we consider it reasonable to hold the shares. However, IMCL is purely speculative and only appropriate for very aggressive investors. El Paso Energy Partners (EPN
): Upgrade to 4 STARS (accumulate) from 3 STARS (hold)
Analyst: John Kartsonas
EPN posts second-quarter earnings per unit of $0.33 vs. $0.19, beating estimates. Results benefited from the recent $750-million acquisition of midstream assets from general partner El Paso Corp. EPN quantified its potential exposure to EP at about $25 million in quarterly revenues, but besides the 26.5% stake EP has in EPN, there is no other financial affiliation between them. EPN units currently yield an attractive 8.1%, mostly tax-shielded. With our estimate of 12-month growth in distributions at about 10%, EPN is attractive. Guidant (GDT
): Keep 5 STARS (buy)
Analyst: Robert Gold
If clinical endpoints are met on drug-coated coronary stents, Boston Scientific litigation moves in GDT/Cook's favor. GDT will pay $3.0 billion in stock for Cook with deal structure providing a high level of protection to shareholders should stent trials prove inadequate for FDA approval or the court does not issue declaratory judgement. We see dilution in 2003 after charge for in-process R&D. However, EPS accretion of $0.60 is possible in 2004, assuming GDT gets 33% of the estimated $4.5 billion drug-coated stent market. The deal looks highly strategic and economically sound. Alpharma (ALO
): Downgrading to 2 STARS (avoid) from 3 STARS (hold)
Analyst: Herman Saftlas
ALO posts second-quarter EPS of $0.20 vs. $0.37 (adjusted), in line with consensus. The drop reflects weakness in animal health, heavier interest expense, and more shares. ALO reduces 2002 EPS guidance by $0.19, to $0.90 (before nonrecurring) on competitive pressures in swine products and generic drugs, currency, and Faulding charges. We see only cash flow breakeven in 2002. ALO is still encumbered by FDA plant issues and an SEC investigation. Its compliance with debt covenants is contingent on its stated forecasts, which may be overly optimistic. Affiliated Computer Services (ACS
): Keep 5 STARS (buy)#
Analyst: Richard Stice
Margins widened on a favorable shift in revenue mix toward higher business process outsourcing services. Discussions with Procter & Gamble regarding a 10-year, $8 billion contract are ongoing. We are keeping our fiscal year 2003 (June) EPS estimate at $2.20. Inclusion of fiscal year 2002 options expense reduces EPS by only 4%, less than for major competitors. At 20 times our fiscal year 2003 estimate, ACS trades at a discount to its historical average and to the broader market on a pe/growth basis. With favorable growth prospects and attractive valuation, buy ACS.