Markets & Finance

S&P Says Hold GE


General Electric (GE): Maintains 3 STARS (hold)

Analyst: Robert Friedman

GE Capital's recent pact to buy troubled British Abbey National's consumer finance business for $1.39 billion reflects CEO Jeffrey Immelt's objective of boosting GE Capital's global presence in the $14 trillion consumer finance business. GE Capital currently is a big player primarily in the U.S. Although it is acquiring $7.1 billion in receivables, that represents only 4% of its total financing receivables. GE is trading at the low end of S&P's $23-$31 fair value estimate.

Tommy Hilfiger (TOM): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Jason Asaeda

Before 62 cents in special charges, December quarter earnings per share of 38 cents vs. 41 cents beat S&P's estimate by five cents. Given the economic conditions, planned store closings and an exit from selected retailers, Tommy sees a mid-digit to high, single-digit percentage decline in sales for fiscal 2004 (March), and earnings per share of $1.00 to $1.20. S&P is reviewing its estimates. Tommy shares are trading at a discount price-earnings multiple to peers, but with near-term visibility limited, S&P would would resist buying on weakness. In view of Tommy's conservative fiscal 2004 outlook, however, S&P says shares are O.K. to hold.

Moody's Corp. (MCO): Maintains 4 STARS (accumulate)

Analyst: William Donald

Moody's posted 45 cents vs. 37 cents fourth quarter earnings per share, and $1.83 vs. $1.32 for full year 2002, beating the Street's consensus by three cents. Annual revenues rose 28% including the KMV acquisition, or 23% excluding KMV. Earnings margins (before interest and taxes) widened to 55% from 52.2%. S&P is projecting a nearly 10% revenue gain for 2003 and slightly narrower EBIT margin. Higher borrowing costs should be offset by a lower tax rate and more share buybacks. S&P estimates a nearly 13% rise in earnings per share to $2.07 for 2003, and a 15% advance to $2.38 for 2004. Moody's is trading at a discount to S&P's $56 intrinsic valuation of its cash flow.

Hotels.com (ROOM): Maintains 3 STARS (hold)

Analyst: Scott Kessler

Excluding certain deprecation, amortization, and marketing & distribution expenses, Hotels.com posted fourth quarter earnings per share of 38 cents (also before a reserve for potential occupancy taxes) vs. 27 cents. Earnings per share was at the low end of reduced guidance provided on Jan. 6. Revenues rose 92%, but declined fractionally from the third quarter on seasonality. The average daily rate for rooms was $117.93, slightly better than S&P's forecast. However, even with the high-margin Hotels.com website accounting for a solid 30% of revenues, margins narrowed on price pressures. With a price-earnings-to-growth multiple well below peers, S&P is keeping its hold rating.

Cisco Systems (CSCO): Maintains 5 STARS (buy)

Analyst: Megan Graham Hackett

January quarter pro forma earnings per share of 15 cents vs. nine cents is two cents above expectations. Earnings per share quality was solid. Surprises included gross margin of 70.4%, optical and high-end router bookings up from the November quarter, and cash from operations of $1.4 billion, up 27% from the November quarter. Cisco sees April quarter revenues flat to down slightly from the January quarter, a bit better than S&P's model. S&P has upped the fiscal 2003 (July) estimate by two cents, to 56 cents. S&P's Core earnings per share estimate is 35 cents. With $21 billion in cash and investments, and shares at a discount to S&P's calulation of intrinsic value at $17.50, Cisco is undervalued.

Boston Scientific (BSX): Reiterates 5 STARS (buy)

Analyst: Robert Gold

The company posted fourth quarter results in line with recent guidance, with sales up 19% before an $11 million currency benefit, and operating earnings per share of 31 cents vs. 20 cents. Boston Scientific notes that January results met their plan, with some upside in urology. The European launch of its drug-coated stent is expected by mid-February. S&P still anticipates a premarketing approval (PMA) filing in the U.S. in June, with the release of Taxus IV data in September and a launch in the early fourth quarter. S&P continues to see 2003 earnings per share at $1.30, and 2004 at $2.50. Estimated S&P Core earnings per share of 89 cents in 2002 is seen rising by 31% to $1.17 in 2003.

Dollar Tree Stores (DLTR): Maintains 4 STARS (accumulate)

Analyst: Karen Sack

Strong cost controls aided third quarter earnings per share, up 35% to 17 cents. Same store sales increased only 0.2%, up 15% with new units. Dollar Tree said that with 97% of holiday merchandise in-stock, West coast dock problems should not affect sales. S&P is raising the 2002 earnings per share estimate by a penny, to $1.36. In 2003, S&P sees square footage increasing 25%, with larger stores. Also, implementation of cost cutting technology should keep margins improving. The stock, trading at 15 times 2003 earnings per share estimate, is at a discount to store peers.


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