Markets & Finance

S&P Says Still Accumulate Household


Household International (HI): Reiterates 4 STARS (accumulate)

Analyst: Robert McMillan

Household announced a preliminary nationwide agreement to settle predatory lending allegations for up to $484 million, which would go into a restitution fund. Household also agreed to institute several consumer-friendly business practices, such as limiting prepayment penalties. The potential settlement should reduce headline news and litigation risks, and lift investor pessimism towards Household. S&P is reviewing its estimates. Shares remain attractive at seven times S&P's current 2002 earnings per share estimate of $4.54, against a 13% long-term growth rate.

General Electric (GE): Maintains 3 STARS (hold)

Analyst: Robert Friedman

A dissection of GE's third quarter earnings per share results shows that the company's underlying earnings power is not nearly as strong as it would appear. After accounting for 2001 goodwill amortization, adjusted pension income effects, and asset sales gains and tax settlements, third quarter S&P Core earnings per share rose 7.1%, to $0.30. Since S&P believes the law of diminishing returns should greatly cut GE's chances of posting long-term free cash growth greater than 5%, S&P cash models appraise GE at $23-$30 a share.

Longs Drug Stores (LDG): Downgrades to 3 STARS (hold) from 5 STARS (buy)

Analyst: Joseph Agnese

Longs lowered its third quater and fourth quarter earnings per share guidance after reporting weaker comp-store sales than expected. It now sees third quarter earnings per share of $0.07-$0.11 compared with the earlier $0.11-$0.16, and sees fourth quater earnings per share of $0.51-$0.56 compared with $0.56-$0.61. September comp sales rose 3.2%, below expectation of 4.0%-5.0%. S&P sees intensifying competition and a weak economic environment continuing to pressure non-pharmacy sales. As a result, S&P is lowering its fiscal 2003 (Jan.) earnings per share estimate by $0.10, to $1.19. However, shares are trading at 0.2 times the calendar 2002 sales, vs. a peer average of 0.6.

Express Scripts (ESRX): Maintains 3 STARS (hold)

Analyst: Philip Seligman

The company sees third quarter EPS of $0.67-$0.69 and full-year 2002 EPS of $2.53-$2.56 vs. the Street's estimates of $0.63 and $2.44, respectively. Results were driven primarily by strong growth in claims volume, especially mail pharmacy services, and increased generic utilization. The company also sees 2003 EPS of $3.10-$3.20, assuming sustainable trends. The outlook is encouraging and S&P raised its estimates to the high end of its guidance. However, S&P would not add to positions until the overhang from the Health & Human Services Dept. and Defense Dept. subpoenas dissipates.

Coinstar (CSTR): Reiterates 5 STARS (buy)

Analyst: Mark Basham

Coinstar says revenues will be at the $41 million high end of previous guidance, with operating leverage obtained from continued expense control leading to EBITDA and net income above the previous $15 million and $8.5 million guidance. S&P is raising its third quarter EPS estimate to $0.37 from $0.30, and is upping 2002's to $1.00 from $0.90, and raising 2003's to $1.45 from $1.35. S&P thinks the news illustrates that Coinstar's business model can leverage further, and is raising its intrinsic value target based on a discounted cash flow analysis to $40-$42.


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