Markets & Finance

S&P Says Hold McDonald's


McDonald's (MCD): Maintains 3 STARS (hold)

Analyst: Dennis Milton

Before charges, McDonald's posted fourth quarter earnings per share of 25 cents vs. 34 cents, in line with the Street's estimate and two cents below S&P's. Restructuring charges of 52 cents per share were significantly higher than previously announced. With more stores in operation, systemwide sales grew 3.7%. Lackluster same-store sales continued to adversely impact margins. At 10 times the 2003 earnings per share estimate of $1.48, trimmed from $1.50, McDonald's is at an attractive discount to peers and the overall market. However, S&P wouldn't add to positions in the absence of improving sales trends.

Dow Jones (DJ): Reiterates 1 STAR (sell)

Analyst: William Donald

The publisher of The Wall Street Journal posted 74 cents 2002 earnings per share versus the 64 cents consensus, down from 2001's $1.14. Revenues fell 12%. Although advertising page declines are moderating each month, comparisons may not turn positive on a year-to-year basis until midyear 2003. The operating outlook is enhanced by a number of strategic actions to fully capitalize on the economic recovery and improve market share, but much of any improvement appears to be already reflected in the stock's price. Dow Jones is trading at a rich 40 times S&P's $1.03 2003 earnings per share estimate and 29 times the $1.43 estimate that S&P tentatively projects for 2004.

Cabot Microelectronics (CCMP): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Richard Tortoriello

Cabot posted December quarter earnings per share of 38 cents, vs. 37 cents -- three cents below the Street's mean. Sales rose 12%, but fell 12% from the September quarter. Copper slurry sales declined sequentially for the first time. Margins declined for the second quarter due to lower volume, and S&P sees customer price concession demands hurting margins going forward. As a result, S&P is lowering the fiscal 2003 (Sept.) earnings per share estimate by 51 cents to $1.55, and is lowering the 2004 estimate by 73 cents to $1.98. With a 2003 price-earnings multiple of 29 vs. the projected growth rate of 18%, S&P sees Cabot as overvalued relative to its S&P 400 peers.

America West (AWA): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: James Corridore

The airline posted a fourth quarter per share loss of $1.05 vs. a loss of $2.49, beating its target. Revenue rose 31%, due to easy comparison sales vs. 2001, strong holiday yields, and a better-than-average business mix (American West has significantly lower walk-up fares than peers). Costs are down nicely on lower aircraft rent since the company got out of some poor leases. S&P says America West is more disciplined on fares, and yields during the holiday periods should improve, but thinks off-peak times will remain weak. The main reason for the upgrade is a decreasing loss and improving yields. S&P cautions that the environment still is poor, and America West's balance sheet is still weak.

Cree (CREE): Upgrades to 2 STARS (avoid) from 1 STAR (sell)

Analyst: Mark Basham

The share price has fallen close to the upper end of S&P's $14 to $16 intrinsic value range. S&P bases intrinsic value estimates on its discounted cash flow analysis. The shares remain unattractive. Although S&P raised the fourth quarter estimates following the recent announcement of better-than-expected December quarterly results, Cree declined to give guidance beyond the current quarter. The quality of earnings is also suspect due to the exclusion of expense related to extensive grants of employee stock options.

Qualcomm (QCOM): Maintains 3 STARS (hold)

Analyst: Ari Bensinger

Qualcomm posted December quarter pro forma fourth quarter of 42 cents vs. 23 cents -- five cents above the Street's mean. Sales rose 27% from the September quarter, on strong 1X MSM chip demand. The company guided the March quarter fourth quarter at 34 cents to 35 cents, above S&P's 31 cents estimate. However, MSM chip growth will be significantly weaker during the second half of fiscal 2003 (Sept.). S&P will keep a keen eye on the potential for a 1X chip inventory situation. Qualcomm is executing superbly in a weak environment, but at 27 times S&P's raised fiscal 2003 fourth quarter estimate of $1.40 and eight times the fiscal 2003 sales estimate -- well above the peer average --- S&P thinks the attractive market opportunity is already factored into the price.


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