Markets & Finance

S&P Cuts Rent-A-Center


Rent-A-Center (RCII): Downgrades to 3 STARS (hold) from 5 STARS (buy)

Analyst: Michael Santicchia

The Equal Employment Opportunity Commission approved a $47 million settlement of two class-action discrimination lawsuits against Rent-A-Center. Although the company already in 2001 took a $52 million charge to cover the cost of the settlement, S&P is concerned that new employment policies will impact its operations and productivity efforts. Despite an attractive valuation of nine times S&P's 2002 EPS estimate of $4.75, S&P sees a downside risk and believes the settlement will put a cloud over the company for the short term.

Quanta Services (PWR): Upgrades to 2 STARS (avoid) from 1 STAR (sell)

Analyst: Mark Basham

Shares have again fallen below $2 as the outlook for telecommunications and cable network capital spending remains bleak. With only limited downside from the current low price, S&P would close its sell positions. Nevertheless, the outlook for Quanta remains poor, and S&P would not, on the other hand, be bargain hunting.

Siebel Systems (SEBL): Maintains 3 STARS (hold)

Analyst: Jonathan Rudy

In a SEC filing, Seibel gave the results of an August 30 exchange offer for employee stock options with a minimum $40 strike price. About 88% of eligible employees elected cash exchange, which should result in a third-quarter cash charge of about $24.2 million, or 1.2% of cash and short-term investments. The 12% that elected for a stock exchange will result in issuance of 5.3 million shares, or about 1% of shares outstanding. While the charge and dilution show the options impact, cash-rich companies like Siebel can offer alternatives for employees that cash-strapped competitors can't.

Palm (PALM): Maintains 3 STARS (hold)

Analyst: Megan Graham Hackett

Palm announced a new $99 consumer handheld, Zire. While the introductory price is well-below the price point ranges of typical handhelds of $299 and up, Palm stated that its gross margin on the Zire approximates its high-end products. S&P believes the move is targeted at stimulating growth from handheld computers by accessing new first-time users to the platform. S&P also views the move as strategic, given the new low-end value products that are expected from Palm's rivals. With shares selling at a price-sales ratio of 0.4, Palm is worth holding.

J.P. Morgan Chase (JPM): Maintains 2 STARS (avoid)

Analyst: Stephen Biggar

J.P. Morgan is rumored to be announcing a staff reduction of about 4,000 to combat continued weak capital markets. Reductions would take place mostly in the areas of underwriting, merger and advisory, and private banking, which have been particularly hard hit. S&P applauds J.P. Morgan's move to realign its expense base with current market conditions. But with the sharpness of a deal slowdown, a substantial proportion of revenues from capital markets activity, and weakening credit quality, S&P sees the shares underperforming.


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