Markets & Finance

S&P Downgrades Jones Apparel to Hold


Jones Apparel (JNY): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Yogeesh Wagle

Jones is involved in a dispute with Polo Ralph Lauren Corp. regarding the Lauren and Ralph brands, for which Jones is a licensee. S&P estimates that in a worst-case scenario, the loss of both licenses (13.5% and 0.8% of 2001 revenues, respectively) at the end of 2003 could cut 2004 earnings per share by 55 cents. More likely is a restructured licensing agreement that leads to higher royalty payments to Polo Ralph Lauren. Given the lower sales and earnings visibility, S&P thinks Jones shares are fairly valued at 9.5 times S&P's $3.05 2003 earnings per share estimate.

Park Place Entertainment (PPE): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Thomas Graves

Park Place shares are weak Tuesday on the prospect that Atlantic City casinos/hotels will face higher state taxes. Park Place had $1.5 billion of casino winnings in Atlantic City in 2002. If the New Jersey state gaming tax were to increase for 2003, to 10% of casino winnings, from 8%, it could cost Park Place about six cents a share of its annual earnings per share, or 11% of S&P's overall estimate of 55 cents. Further profit pressure could come from sales tax on free items given to gamblers. S&P still views Park Place as an attractive cash flow story, but the tax cloud is likely to limit the stock.

American International Group (AIG): Downgrades to 2 STARS (avoid) from 4 STARS (accumulate)

Analyst: Catherine Seifert

S&P is trimming the 2002 operating estimate of 65 cents, to $2.75 to reflect the fourth quarter's $1.8 billion net charge to cover a $2.8 billion pretax reserve boost. S&P also is lowering the 2003 opereating earnings per share estimate by 15 cents, to $3.85. The $2.8 billion addition is modest given AIG's $30 billion in general loss reserves. But, the erosion in casualty lines reserves (not asbestos) shocked investors. With AIG's "financial strength" premium multiple evaporating, S&P sees the shares trading in line with the peer group average, which implies another 10% or so downside.

Avon Products (AVP): Maintains 4 STARS (accumulate)

Analyst: Howard Choe

Avon posted fourth quarter earnings per share of 80 cents vs. 46 cents, in line with S&P's guidance. Sales growth remains strong, up 5% (+14% in local currency) with volume up 16% and sales representatives up 13%. Europe and Pacific led regional sales growth, up 28% and 9%. Operating margins expanded 70 basis points, helped by restructuring benefits. Avon's 2003 targets of 5-6% sales growth and 100 basis point operating margin expansion are in line with S&P's expectations. With peer leading volume growth and solid execution, Avon is appealing at 19.5 times S&P's 2003 earnings per share estimate, in line with personal care peers.

ResMed (RMD): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Robert Gold

The medical equipment maker posted fiscal 2003 (June) earnings per share of 30 cents vs. 26 cents, a penny below S&P's forecast due to litigation expense. Revenue growth of 33% beat expectations as a 7% foreign exchange benefit joined with rising sales of flow generators, diagnostics, and masks. Germany sales rebounded nicely, rising 33%. The inventory issue appears to be resolved as the SMI acquisition is integrated. S&P is leaving the fiscal 2003 estimate at a below-consensus $1.25, or 90 cents after an estimated option expense. With three-year growth seen at 23%, S&P has a 12 month target of $37, or 21 times S&P's fiscal 2004 estimate of $1.60.


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