Markets & Finance

Still Buy P&G


Procter & Gamble (PG): Reaffirms 5 STARS (buy)

Analyst: Howard Choe

Before extraordinary items, P&G posted June quarter EPS of $0.77 vs. $0.63, $0.03 above S&P and Street estimates. Revenue growth was better than expected, up 5% on 7% higher volume. Restructuring benefits, cost-cuts and lower material prices led to gains in gross and operating margins of 280 and 160 basis points, respectively. Free cash flow rose a strong 80%. P&G's fiscal 2003 (ending June) guidance calls for mid-single-digit sales and double-digit earnings growth. We view this as easily achievable, and as reaffirmation of the company's turnaround. P&G is attractive at a p-e of 22 and a discount to its intrinsic value.

Sealed Air (SEE): Downgraded to 2 STARS (avoid) from 4 STARS (accumulate)

Analyst: Stewart Scharf

The shares were off 11% today, following hugh swings last week after an asbestos ruling. We still think Sealed Air will be cleared of fraudulent transfer charges in the Sept. 30 trial. The company claims to have conducted solvency analysis before acquiring bankrupt W.R. Grace's Cryovac unit in 1998, and says Grace was solvent by a large margin. We see the potential for further downside should the company receive an adverse decision, which could jeopardize its credit quality. At 6 times the $2.47 EPS we see in 2002, the shares are well below historical p-e ratios.

Church & Dwight (CHD): Reiterates 4 STARS (accumulate)

Analyst: Howard Choe

Before unusual items, the company posted Q2 EPS of $0.40, vs. $0.34, $0.04 above S&P and Street estimates. Sales rose 13%, aided by businesses recently acquired from Carter Wallace, though its core businesses increased a respectable 4%. Operating margins narrowed slightly on plant integration issues but should improve in the second half. We view the company's 3-year financial and operating targets as attractive and achievable considering the company's solid track record. Church & Dwight is attractive at a p-e of 18, a modest discount to its peers.

Hovnanian Enterprises (HOV): Reiterates 5 STARS (buy)

Analyst: Mark Basham

The company sees fiscal year EPS significantly exceeding expectations. With all of its forecasted deliveries for fiscal 2002 (ending October) already closed or in backlog, Hovnanian is taking orders for fiscal 2003 delivery. Based on expected deliveries for the rest of the year, we are raising our $3.30 EPS estimate for fiscal 2002 to $3.50. The range of current Wall Street estimates is $3.10 to $3.35. We are also bumping our fiscal 2003 forecast up to $4.10 from $4.00. Based on a revaluation of what the company's probable peak earnings power is, we expect the stock, now trading at 6 times our fiscal 2003 estimate, to hit our target of 10x the estimate.

Avocent Corp. (AVCT): Still 3 STARS (hold)

Analyst: Megan Graham-Hackett

Avocent announced an agreement to acquire 2C Computing for roughly $22.8 million in cash. 2C is a maker of digital extension technology that enables a PC's motherboard, processor and hard drive to be located a distance from the user, thus supporting remote control of desktop PCs. The company's product began shipping in April, 2002. The technology fits well with Avocent, which originally licensed the base technology to 2C. However, we await further financial details from AVCT's 10:30 a.m. EDT conference call today.


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