Markets & Finance

S&P: Avoid SBC


SBC Communications (SBC): Keep 2 STARS (avoid)

Analyst: Todd Rosenbluth

SBC posts third-quarter EPS $0.51, vs. $0.59, after charges, slightly ahead of our estimate. Revenues were down 5.5%, still hurting from weak voice and slow data results on substitution and declining enterprise spending. Despite workforce cuts, EBITDA margins narrowed to 40.1%, plagued by low wholesale rates. SBC said that there could be EPS pressure in 2003 related to its pension plans (pension credits in 2001 boosted EPS by nearly 20%). Given weak prospects and earnings quality issues, we would steer clear of the stock at 12 times our 2003 EPS estimate.

Eastman Kodak (EK): Keep 1 STAR (sell)

Analyst: Richard Stice

EK posts third-quarter operating EPS of $1.04, vs. $0.52, in line with upwardly revised guidance. Net sales rose 1% as gains in health imaging segment outweighed weak U.S. film industry volume. We are keeping 2002 EPS estimate at $2.70, and 2003's at $2.94. Under SFAS 123, 2001 reported EPS $0.26 would be reduced to $0.01 loss if stock-based compensation expenses are included. At 12 times our 2003 estimate, EK trades at a discount to the broader market. But with persistent weakness in the traditional film market and concerns over earnings quality, we would place funds elsewhere.

AT&T Wireless (AWE): Upgrading to 2 STARS (avoid) from 1 STAR (sell)

Analyst: Todd Rosenbluth

AWE posts $0.76 GAAP loss per share vs. EPS of 3 cents, including 80 cents in charges to write down licensing costs and investments. Services revenues rose 16% on an encouraging 201,000 net gain of subscribers, despite the loss of 300,000 wholesale customers. EBITDA margin was up, but still below peers. AWE completed most of its network upgrades, but took a 17% deferred tax valuation allowance on uncertain future profitability. With $15 billion in long-term liabilities, AWE should trade at a relative discount on a sales and EBITDA basis.

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

Analyst: Michael Jaffe

TYC posts September-quarter EPS of 30 cents before charges, vs. 61 cents, at the low-end of its Sept. 2 guidance. Results were hurt by the soft electronics markets, pricing pressures and higher tax rate. TYC now sees $1.50-$1.75 EPS and $2.5 billion to $3.0 billion of free cash flow in fiscal year 2003 (September), and has $6.5 billion of cash. We still see $1.55 EPS in fiscal year 2003. Accounting review has yet to uncover any big abnormalities, and TYC should be able to fund $11 billion of debt maturing over the next five quarters. But sluggish trends and uncertainties from exploits of prior regime leave us neutral at 10 times our fiscal year 2003 estimate.

Affymetrix (AFFX): Upgrading to 3 STARS (hold) from 1 STAR (sell)

Analyst: Frank DiLorenzo

Product sales were $62.9 million, $1.7 million above our view. Proforma EPS of 5 cents beat our 1 cent estimate. 2003 p-e/growth ratio of 1.5 times is high relative to firms in the R&D tool space, but sales were stronger than expected despite weakness in life science industry spending on R&D. Largely on AFFX's GeneChips, which hold leadership position, we see sales strength in the fourth quarter and 2003, even if industry spending is low. We see 2002 proforma EPS $0.10 (up from $0.09); 2003 EPS at $0.46 (up from $0.41). On improving fundamentals, these high-risk shares are reasonably priced.

Nextel Communications (NXTL): Keep 3 STARS (hold)

Analyst: Todd Rosenbluth

NXTL posts third-quarter EPS of 55 cents after a 41 cents gain for debt retirement, vs. a 27 cent loss, ahead of estimate. We were pleased with the addition of 480,000 net subscribers and with EBITDA margin expansion to 41% on lower handset costs and billing outsourcing. We have concern with debt at 3.9 times annualized EBITDA, and about the impact of options expenses (would have cost $0.42 in 2001). Still, given strong relative prospects and industry leading revenue per user, NXTL deserves a premium to peers on an enterprise value/sales and EV/EBITDA basis.


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