Markets & Finance

S&P Upgrades Texas Instruments to Hold


Texas Instruments (TXN): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Thomas Smith

The chip maker's share price has fallen a bit since its improved guidance on December 3, creating a slightly better valuation. Although the price-earnings ratio on S&P's pro forma estimate of 35 cents for 2003 is 50 -- more than twice the market's multple -- S&P forecasts 70 cents earnings per share for 2004, indicating a price-earnings multiple of 25, which is a premium that is more in line with TI's peers.

The price/book ratio is near three -- below its annual highs since 1997. Wireless and high-end analog chips are seeing some demand pickup and are a good niche for this decade. Overall, S&P sees a balanced risk/reward as the chip industry expansion plods along.

Photronics (PLAB): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Richard Tortoriello

The chip-equipment maker posted an October quarter loss per share of six cents before restructuring charges, vs. earnings per share of seven cents, in line with expectations. Sales slipped 4%. While Photronics sees January quarter sales down 11% to 17% from the October quarter because of holiday shutdowns at chip makers, S&P believes there's a significant pipeline of new chip designs ready for production early in 2003.

Photronics' stock hit record lows on a price/sales basis in October, and now sells just above those lows -- at 1.2 times its sales. S&P estimates earnings per share of six cents in fiscal 2002 (Oct.) and 86 cents in fiscal 2003. With the leading position in the photomask market, Photronics is attractive.

Electronic Data Systems (EDS): Reiterates 2 STARS (avoid)

Analyst: Richard Stice

Shares are up 10% Wednesday, aided by news that EDS is in final discussions to provide IT services for the Bank of Bermuda. The deal has an estimated contract value of $375 million over 12 years. S&P views the deal as a positive, part of a larger effort by the company to focus on relatively smaller outsourcing opportunities. At eight times S&P's 2003 earnings per share estimate of $2.37, EDS trades well below the broader market and its historical price-earnings average.

But despite the news, S&P sees limited prospects for IT services for the near term. Combined with doubtful management execution, S&P would avoid EDS.

Kimberly-Clark (KMB): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Howard Choe

Kimberly-Clark has lowered its earnings per share guidance for the fourth quarter to a range of 72 cents to 76 cents from a range of 82 cents to 86 cents, citing competitive pressures in diapers and training pants and weaker international sales. Competitive pressures are coming from Procter & Gamble and private label companies. Product differentiation remains difficult in Kimberly-Clark's operating segments. S&P sees few catalysts to resurrect sales growth and fears that pricing pressures could erode margins. S&P has lowered the 2002 earnings per share estimate to $3.34 from $3.45 and cut 2003's to $3.60 from $3.76.

Raytheon (RTN): Maintains 3 STARS (hold)

Analyst: Robert Friedman

S&P says the departure of CFO Frank Caine is not surprising. After constant cost estimate changes related to the botched sale of Raytheon's construction unit, the financial community had lost confidence in the company. It also didn't help that Mr. Caine seemingly played favorites in the stock research community. However, S&P is hopeful that the new CFO will dramatically improve the financial transparency of the military electronics/missiles-making giant. S&P's models value Raytheon worth between $25-$29 a share.

MetLife (MET): Maintains 5 STARS (buy)

Analyst: Catherine Seifert

The life insurance company raised its operating earnings per share guidance for 2003 to $2.80-$2.90, emphasizing the diversified business mix that has allowed it to weather turmoil in the equity markets. S&P also is encouraged by MetLife's cost cutting, which should help offset a rise in pension and option expenses. S&P is keeping the conservative $2.55 estimate of 2002 operating earnings per share, but is raising the 2003 estimate by five cents to $2.80. MetLife shares are undervalued at 10 times S&P's conservative 2003 estimate. S&P's six to 12 month target price: $33-$34.


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