Markets & Finance

S&P Says Hold Marriott


Marriott International (MAR

): Maintains 3 STARS (hold)

Analyst: Thomas Graves

The acquisition interest in Marriott's senior living business is not a big surprise. S&P is expecting a sale or spin-off. However, excluding unusual items, S&P estimates operating profit from senior living at less than 5% of Marriott's 2002 total. Expectations for the company's larger lodging segment should be a much bigger factor in the stock price.S&P still isn't enthused by the outlook for business travel, and sees the stock adequately priced at 17 times the 2003 earnings per share estimate (including senior living) -- close to a recent "bottom up" price-earnings multiple for the S&P 500.

IMC Global (IGL

): Reiterates 5 STARS (buy)

Analyst: Richard O'Reilly

The distributor of crop nutrients sees an expected fourth quarter loss of six cents to eight cents vs. a 10 cent deficit, reflecting a combination of reduced phosphate margins vs. the third quarter, and sluggish volumes. Export phosphate prices have fallen since the summer, while raw material costs are higher. Potash volumes are lower than thought due to delayed export sales, but IMC seems to have achieved most of its proposed price hike. While S&P is cutting the 2002 earnings per share estimate to 10 cents and is trimming the 2003 EPS estimate to 50 cents from 80 cents, S&P thinks the fundamentals for a cyclical recovery are still in place, led by expected higher shipments for 2003.

Johnson & Johnson (JNJ

): Maintains 4 STARS (accumulate)

Analyst: Herman Saftlas

A New York Times article said that European authorities may limit sales of J&J's Exprex anti-anemia drug because of linkage with red blood cell aplasia in renal patients. However, this condition was not seen in the U.S. Procrit version. J&J is consulting with French officials to rectify the problem, which may be related to the drug's administration. S&P is maintaining the $2.62 earnings per share estimate for 2003, boosted by a significant contribution from its new Cypher drug-coated coronary stent. The stock is valued in line with the big-pharma multiple.

Level 3 Communications (LVLT

): Maintains 2 STARS (avoid)

Analyst: Todd Rosenbluth

Few additional details were provided about Level 3's acquisition of Genuity for up to $242 million. S&P thinks the all-cash deal will boost revenues in 2003 by roughly $700 million, with contracts with AOL and Verizon a plus. S&P is narrowing the 2003 loss per share estimate by 27 cents to $2.21. However, the addition of relatively lower margin Genuity business and Level 3's junk credit interest coverage is expected to be at only 1.0 times earnings per share. With sizable integration risks and weakness in the communications transport business, S&P would steer clear at 15 times the company's 2003 EBITDA.

Tenet Healthcare (THC

): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Robert Gold

S&P expects the news flow to remain generally negative over the near term, but thinks the stock is gaining support from value-oriented investors amid company efforts to clarify Medicare and commercial pricing strategies. In something of a worst case basis excluding Medicare outlier payments, S&P thinks fiscal year 2003 (May) revenues would approximate $14.9 billion, while earnings per share would likely be in the $2.05 to $2.15 range. S&P would not establish new positions, but with Tenet shares trading at 0.6 times sales and nine times earnings per share under this bearish scenario, the bottom may have passed.

UAL Corp (UAL

): Reiterate 2 STARS (avoid)

Analyst: James Corridore

After rejecting wage cuts recommended by its leadership last week, UAL machinists are set to vote Thursday on a similar proposal with some language changes. S&P was surprised the deal was rejected last week, but given the limited changes in the concession package, S&P sees a good chance they will again reject it, which would likely lead to a bankruptcy filing soon thereafter. Even if the deal is approved, the risks are still extremely high given UAL's high cost structure, enormous debt burden, large losses, and a less-than-assured guarantee of a government loan.

Overture Services (OVER

): Keeps 5 STARS (buy)

Analysts: Scott Kessler, Richard Stice

Earlier Monday, Overture announced that its existing contract with Britain-based Internet service provider Freeserve has been automatically renewed through February, 2003. S&P thinks the extension should be helpful in reinforcing Overture's international expansion plans. S&P sees Overture as a core Internet holding and a leader in pay-for-performance online advertising. With the shares trading at a 2003 price-earnings-to-growth ratio below the broader market, and with favorable earnings quality and a strong balance sheet, Overture remains attractive for purchase.


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