Markets & Finance

S&P Says Still Hold Aetna


Aetna (AET): Maintains 3 STARS (hold)

Analyst: Phillip Seligman

The health insurance giant plans to cut some 2,750 positions, or 9% of its workforce, in 2003, and take a third-quarter charge of about $0.39 per share for severance costs. Despite this cost-saving move, earnings visibility is very low amid intense competition, as seen by the loss of the Microsoft account. S&P stills see 2002 earnings per share of $1.48, but projects the majority of income ($1.36) reflecting the absence of goodwill amortization costs. S&P notes, too, that Aetna's 2001 operating loss of $1.96 would have been wider if not for $1.74 in income from its overfunded pension plan.

M&T Bank (MTB): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Evan Momois

S&P believes the $3.1 billion acquisition of troubled Allfirst Financial makes strategic sense for M&T and in the longer term is positive for its shareholders. M&T has a record of successfully integrating troubled banks and improving their operating efficiency, and will have to work on Allfirst's asset quality and expenses. The new M&T will have assets of about $49 billion, up from about $32 billion today, plus a sizeable asset management business, and a retail presence as far south as Virginia with over 700 branch locations versus today's 450.

Felcor Lodging (FCH): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Raymond Mathis

Felcor reduced its guidance for third-quarter funds from operations to $0.44-$0.48 per share. This is well below consensus estimates, and represents a significant cut from prior guidance. Felcor's continued earnings funk does not bode well for its goal of paying aggregate dividends of $1.00 in 2002. Given the limited visibility, S&P feels paying out 75% of funds from operations would be imprudent. However, the share price could slide if Felcor fails to raise its quarterly dividend to $0.35 in the third quarter, putting the company in a tough position.

Nortel (NT): Maintains 3 STARS (hold)

Analyst: Megan Graham Hackett

The company now sees third-quarter revenues down 15% from the second quarter, compared with prior guidance of down as much as 10%, reflecting a slump in carrier spending in the U.S. and wireless networks in Asia. However, Nortel expects the third quarter's net loss to widen only slightly from the second quarter's $0.09 net loss, aided by lower than expected taxes. In addition, Nortel plans to propose a reverse stock split at a shareholders meeting in the spring. With shares at a discount to peers on a price/sales basis, S&P says Nortel is O.K. to hold.

Merrill Lynch (MER): Maintains 3 STARS (hold)

Analyst: Robert McMillan

Given the weakness in the equity markets and sharp decline in corporate finance activity, results will be pressured near term. Commissions, principal transactions, investment banking, advisory and asset management revenue as well as interest income are poised to fall from year-ago levels before picking up in 2003. S&P is lowering the earnings per share estimates for 2002 to $2.52 from $2.79, and for 2003 to $3.03 from $3.57. Shares are trading at 11 times S&P's 2003 earnings per share estimate, and S&P considers Merrill as fairly valued given its weak near-term industry and business prospects.

Constellation Brands (STZ): Maintains 5 STARS (buy)

Analyst: Richard Joy

Constellation Brands reported August-quarter earnings per share of $0.53 vs. $0.46, as expected. Strong profit growth was led by imported beer (+25%), fine wine (+49%) and the U.K. branded foreign/wholesale business (+8%). Margins widened on higher import beer prices and lower spirits costs and improved sales mix. S&P is keeping its fiscal 2003 (Feb.) earnings per share estimate at $2.04, a 15% gain. S&P expects a strong free-cash flow to fund debt reduction and acquisitions. Shares remain attractive at only 12.5 times the fiscal 2003 estimate, an unwarranted and substantial discount to the S&P MidCap index and its peers.


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