Markets & Finance

S&P Upgrades Tootsie Roll to Hold


Tootsie Roll (TR): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Marcos Kaminis

Tootsie Roll shares have traded down into S&P's target range of $30-$31, and S&P views the shares as fairly valued. The shares would still seem pricey, at 19.5 times S&P's 2003 earnings per share estimate of $1.54, versus S&P's 8% long-term growth forecast. However, when compared to close candy confectioner peers, they are about in line. In addition, consumer staple shares may deserve a price-earnings premium in the current market environment. Importantly, S&P's valuation of discounted cash flows implies an intrinsic value at just below $30.

Carpenter Technology (CRS): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Leo Larkin

Following the company's decision to cut the annual dividend to $0.33 from $1.32 and eliminate 10% of the workforce, S&P believes the worst is over for the near term. Carpenter Technology has been incurring losses because of weak aerospace and power generation markets and overall sluggish durable goods demand. S&P sees $0.65 earnings per share in fiscal 2003 (June) vs. fiscal 2002's $0.35 loss on gradual improvement in industrial markets and smaller rates of decline in aerospace and power generation sectors. The shares no longer warrant an avoid opinion on that basis.

FedEx (FDX): Maintains 5 STARS (buy)

Analyst: James Corridore

FedEx held a meeting Tuesday in New York, and S&P came away impressed in several areas. The package delivery company's strength in ground delivery is coming from marketshare gains, not from the cannibalizing express business, which is holding its share. FedEx's ability to service customers via air, ground or truck at high productivity levels is a major strength. After 2002, outlays for new aircraft are minimal. Also impressive is the depth of management and transparent financial disclosures. S&P increasingly feels FedEx will outperform peers, and view its shares as undervalued at a big discount to rival UPS.

Wellman (WLM): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Richard O'Reilly

Wellman cut its guidance for second-half earnings per share to well below the Street's consensus. The chemical manufacturer cited unexpected lower margins for polyethylene terephthalate (PET) polyester resins because of higher raw material costs and selling price pressures. S&P did know that a July price increase failed, but an earlier increase may have also eroded. S&P is cutting its 2002 earnings per share estimate for 2002 to $0.88 from $1.15. S&P still feels the longer-term outlook for PET resin remains positive, but would not add to holdings in view of a near-term earnings per share disappointment.

Expedia (EXPE): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Despite a reported contract dispute with Northwest Airlines, S&P says hold Expedia. Shares are down some 4% Wednesday morning on an Associated Press story saying that contract-extension talks between the two companies have broken down. S&P has confirmed that Expedia's website isn't currently offering Northwest flights. S&P thinks Northwest is interested in more favorable distribution terms, comparable to those offered by Orbitz, in which it owns a stake. S&P expects a mutually beneficial deal to be struck, given that Expedia.com is an important sales channel for Northwest.

Chico's (CHS): Maintains 5 STARS (buy)

Analyst: Tuna Amobi

Chico's says it is comfortable with the Street's $0.16 October-quarter mean earnings per share estimate, and that September same-store sales were trending above low double-digit growth expectations. It also notes that it is "largely unaffected" by the unraveling West Coast dockworkers lockout. S&P sees these developments as encouraging, and continues to view the women's retailer as a very compelling growth story in a difficult retail environment. S&P expects Chico's senior management to express consistent views at Wednesday's RBC Capital Markets Consumer Conference presentation.


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