Markets & Finance

S&P Downgrades Bisys to Avoid


Bisys Group (BSG): Downgrades to 2 STARS (avoid) from 3 STARS (hold

Analyst: Richard Stice, Thomas Smith

Bisys guided its September-quarter earnings per share lower, to $0.20 before restructuring charges, compared with the Street's $0.22 consensus. The provider of business process outsourcing to financial companies also finalized a restructuring charge of $0.06 per share, net of tax, and announced a new $100 million share buyback program. Customers are hesitant in face of a slowing economy. S&P is lowering the fiscal 2003 (June) earnings per share estimate to $1.05 from $1.15, and is cutting fiscal 2004's to $1.30 from $1.43. Uncertainty about the pace of business warrants caution.

Cendant (CD): Maintains 5 STARS (buy)

Analyst: Thomas Graves

The stock is down sharply after news of a third-quarter non-cash writedown of $0.17 a share in the capitalized value of expected future earnings related to mortgage servicing. This follows heavy levels of mortgage loan prepayments and refinancings. Including the writedown, but excluding other special items, S&P is cutting the 2002 earnings per share estimate to $1.27 from $1.40, and is trimming 2003's to $1.58 from $1.60. With the company expected to have a large amount of future free cash flow, S&P thinks the market overly discounts the stock for Cendant's complexity and tarnished past.

RF Micro Devices (RFMD): Downgrades to 2 STARS (avoid) from 1 STAR (sell)

Analyst: Thomas Smith

RF Micro guided September-quarter earnings per share up to $0.03 earnings per share, from the prior $0.01-$0.02. More importantly, the company says order visibility is improving and expects December-quarter revenue to rise from the September quarter. Higher capacity utilization should help improve gross margin. S&P is raising the fiscal 2003 (Mar.) earnings per share estimate to $0.13 from $0.11, and still sees fiscal 2004 at $0.25. S&P thinks the improvements in the pace of business warrant a less bearish outlook. However, the price-earnings multiple remains well above the market at 27 times S&P's $0.23 calendar 2003 estimate (before tbe options expense).

Home Depot (HD): Reaffirms 4 STARS (accumulate)

Analyst: Tuna Amobi

The company agreed to acquire three residential construction flooring businesses, signing definitive pacts to acquire Floors Inc., Arvada Hardwood Floor, and Floorworks Inc. Terms of the transactions were not disclosed. The three companies reportedly maintain relationships with 17 of the top 20 U.S homebuilders and are major players in the $12 billion residential flooring materials and services market. The deals should make Home Depot the largest supplier in this segment, provide a new growth platform, and aid its efforts to broaden product assortments.

International Paper (IP): Reiterates 3 STARS (hold)

Analyst: Bryon Korutz

IP expects its Q3 earnings to be in line with the mean Wall Street estimate of $0.32. S&P is reducing its optimistic estimate to $0.32 from $0.40; S&P now expects $1.29 for all of 2002. S&P continues to see results likely aided by cost controls and by improving demand and prices for packaging and paper. However, with weakness in lumber prices and in coated papers amid oversupplied markets, S&P would hold International Paper at 14 times S&P's 2003 EPS estimate of $2.40, in line with the S&P 500.

Tyco International (TYC): Reiterates 3 STARS (hold)

Analyst: Michael Jaffe

In Ed Breen's first conference call as CEO, Tyco reduced its September quarter EPS guidance to $0.30-$0.33, compared with the $0.46 wall street consensus. This reflects Tyco's decision to raise its full-year tax rate calculation and ongoing weakness in its telecom business. Notably, with 40% of a forensic accounting study complete, Tyco has seen no reasons to restate results. We are cutting our fiscal 2002 (ending September) estimate to $1.85 from $2.00 and our fiscal 2003 forecast to $1.55 from $2.00. Tyco is modestly valued at 9 times our fiscal 2003 estimate, and Breen was reassuring on the company's outlook and financial condition during the call, but lingering uncertainties leave us neutral on the shares.


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