Markets & Finance

Sell Lockheed Martin


Lockheed Martin (LMT): Reiterates 1 STAR (sell)

Analyst: Robert Friedman

The world's largest defense contractor posted third quarter GAAP earnings per share of $0.66 vs. a $0.20 loss. On an economic basis, earnings per share rose 17%, to $0.55. Despite solid short-term results, S&P is skeptical that Lockheed can continue recent earnings per share growth rates. The potential for intensifying competition, long-term defense spending hikes and high fixed cost structures should put a lid on outsized sustainable volume and pricing growth, as well as margins and return on equity. S&P calculates that Lockheed is worth $35 a share, well below the current price.

Cigna (CI): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Phillip Seligman

Cigna shares are down sharply after it slashed guidance on third quarter operating earnings per share to $1.47 from $1.95-$2.05 based on poor healthcare performance. It now sees 2002 earnings per share of $6.50-$6.75, before a fourth quarter restructuring charge. Cigna is hiking its pension liability, thereby cutting shareholders equity by $600 million to $700 million. This is in addition to a $1 billion-plus charge for reinsurance losses. S&P sees poor operating performance and deteriorated finances severely limiting Cigna's financial flexibility while encouraging even profitable accounts to desert. With likely reduced cash flows, S&P says the fix may take years.

Tektronix (TEK): Downgrades to 1 STAR (sell) from 3 STARS (hold)

Analyst: Stewart Scharf

S&P expects weak demand for optical and video test items to offset sales of new higher-margin logic analyzers and oscilloscopes. S&P sees a nine-cent dilution from the Sony/Tektronix acquisition. Tektronix added $15 million to its pension fund in the August quarter. Earnings per share quality remains low, as 45 cents of pension and stock option costs, plus other items, would have resulted in a 28-cent loss in fiscal 2002 (May) vs. reported earnings per share of 33 cents. Some 80% of stock options are under water. At 38 times S&P's new 45-cent fiscal 2003 estimate, reduced by 10 cents -- a steep premium to the S&P 500's price-earnings multiple -- S&P says investors should divest their positions.

Green Mountain Coffee (GMCR): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Mark Basham

The coffee roaster sees 2002 earnings per share at 82 cents to 83 cents, and guided 2003 earnings to a 10%-15% rise before losses from Keurig, its single-cup brewer business. S&P thinks there may be rising resistance in the retail channel to Green Mountain's premium pricing. Also, the company has not explained satisfactorily its strategy for making Keurig profitable in a timely manner. S&P is lowering the 2002 and 2003 estimates both to 83 cents, from 90 cents and $1.00, respectively. Without near-term growth prospects, Green Mountain no longer merits a valuation premium. S&P is revising its target price range to $13-$15 from $22-$24.

Navistar International (NAV): Downgrades to 1 STAR (sell) from 3 STARS (hold)

Analyst: James Sanders

Despite Friday's announcement of a tentative agreement with the United Auto Workers, S&P is still skeptical about Navistar's forecast of a return to profitability in fiscal 2003 (Oct.). In addition, the company's potential contribution of company stock to fund its significantly under-funded pension plan raises further questions about its overall financial health. Finally, S&P's intrinsic valuation model, which assumes long-term bond rates of 4%-5%, indicates that shares are trading at a 35%-45% premium to its fair value.

Sysco (SYY): Reiterates 5 STARS (buy)

Analyst: Joseph Agnese

The food service company reported August quarter earnings per share of 28 cents vs. 26 cents -- a penny ahead of S&P's estimate. Sales grew 10.2%, reflecting 7% real growth plus acquisitions. Sysco continues to gain share within customers and from competitors as it expands its customer base. Higher-margin sales to independent customers represent 57.2% of total sales, up from 56.2% in the prior year. Margins are also benefiting from a rise in Sysco Brand product sales. The stock is trading above peers at 26 times S&P's fiscal 2003 (June) estimate of $1.18. But with consistent earnings per share growth and a healthy return on equity, S&P see Sysco as outperforming.


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