Markets & Finance

S&P Upgrades Allstate to Accumulate


Allstate (ALL): Upgrades to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Catherine Seifert

The property-liability insurer posted 87 cents vs. 43 cents fourth quarter operating earnings per share, better than expected. Full year's $2.92 vs. $2.06 included 12 cents vs. 11 cents of restructuring charges. The results reflect rate adequacy and improved claim trends. Although the 5.8% 2002 written premium growth was below S&P's projection, it reflected 11% lower non-standard auto premiums, which S&P says is O.K. At 10 times S&P's $3.20 2003 estimate, with decent rate and claim trends, a stable ratings outlook, and limited exposure to long-tail casualty risks, Allstate is undervalued. S&P's 12-month target is $38.50.

Pepsi (PEP): Maintains 5 STARS (buy)

Analyst: Richard Joy

Pepsi reported fourth quarter earnings per share of 50 cents vs. 44 cents, in line with expectations. Full 2002 earnings per share was $1.96 vs. $1.72. Fourth quarter worldwide sales grew 7% on 5% snack volume growth and 3% beverage gain. Snack profits rose 9.9% on 7.2% North American and 18% international growth; Quaker Foods profits rose 9.5%. Worldwide beverage profits increased 8.8%. U.S. market shares increased, and cash flow remains strong. S&P is keeping its 2003 earnings per share estimate at $2.20, and views Pepsi as attractive on market leadership positions, growth potential, and earnings visibility.

Gannett (GCI): Maintains 5 STARS (buy)

Analyst: William Donald

The media and publishing company posted 2002 earnings per share of $4.31, rising 38% on a1% revenue gain and meeting S&P's expectations. Revenue for 2003 could rise 6%, and with newsprint costs lower and cost controls, S&P sees a 13% earnings per share gain to $4.87. S&P also projects a 16% earnings per share advance to $5.65 for 2004 in a stronger economy. Although Gannett's earnings per share gains for 2003 are in line with peers, its price-earnings ratio of 15 is well below the group. Earnings quality is better than peers, with S&P Core Earnings (adjusted to include pension and option costs) 16% below reported 2002 earnings per share, vs. a 24% average adjustment for peers.

Anheuser Busch (BUD): Maintains 5 STARS (buy)

Analyst: Howard Choe

The beer maker reported fourth quarter earnings per share of 32 cents vs. 26 cents, as expected. Net sales and worldwide volume rose 7% and 2.5%, respectively. Domestic revenue per barrel rose 4% on higher pricing and new products. Domestic marketshare increased to 49.2% and normalized operating margins widened 50 basis points. S&P is encouraged by the company's solid outlook for 2003. Given good earnings visibility and consistency, its niche dominance, and strong cash flow growth, Anheuser Busch is appealing at 19 times S&P's 2003 earnings per share estimate of $2.47, and 20 times the projected S&P Core earnings per share (adjusted to include a pension and options expense).

Timberland (TBL): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Amrit Tewary

Timberand posted fourth quarter earnings per share of 73 cents, well above consensus, on strong overseas sales. S&P sees Timberland benefiting from the recent diversification of a product line and supply management initiatives. S&P expects 2003 results to benefit from foreign exchange effects and lower shipping costs. S&P is also raising the first quarter earnings per share estimate to 32 cents from 30 cents, and is upping the 2003 estimate to $2.84 from $2.67. On a S&P Core earnings per share basis, S&P sees 2003 estimates reduced by 9%. The stock is undervalued as the ratio of price-earnings-to-growth on 2003 operating income is at a discount to peers and the S&P 400.

Nvidia (NVDA): Reiterates 3 STARS (hold) and Microsoft (MSFT): Reiterates 5 STARS (buy)

Analyst: Thomas Smith

The settlement between the two companies ends the arbitration over pricing on Nvidia's graphics processors for Microsoft's Xbox. The resolution of dispute brings more certainty to the companies' earnings streams as the supply relationship will continue uninterrupted. However, details are being held back until Nvidia's earnings call on Feb. 13, so just how much of a win this is for each company remains to be seen. On a weaker revenue and margin outlook, S&P is lowering Nvidia's 2003 (Jan.) earnings per share estimate to 75 cents (before charges) from 77 cents, and is cutting the fiscal 2004 estimate to 60 cents from 75 cents.


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