Markets & Finance

S&P Raises Unocal to Accumulate


Unocal (UCL): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: John Kartsonas

After a recent decline, this oil and gas explorer and producer is now trading at a discount to its peers. The market now values Unocal's proven reserves at $5.50 per barrel of oil equivalent, well below the peer average of $6.78. Some of the discount is warranted, given that two-thirds of Unocal reserves are outside North America and most of gas production price realizations are well below current U.S. market prices. However, at an enterprise value of 5.2 times S&P's 2003 debt-adjusted cash flow estimate, below peers, and at a 15% discount to S&P's net asset value calculation, Unocal is attractive.

Cree (CREE): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Mark Basham

The chip-equipment manufacturer's shares are down 45% since the end of 2001 despite the rally off last October's lows. Recent price volatility reflects better-than-expected results, aided by increased chip sales for automotive and wireless handset markets, partly offset by results mixed at best for the overall tech sector. Shares are at the high end of the $14-$16 range S&P estimates for discounted cash flow-based intrinsic value. Also, S&P's estimate of 2003 (June) S&P Core Earnings of 12 cents reflects 29 cents of unexpensed stock options.

MetLife (MET): Reiterates 5 STARS (buy)

Analyst: Catherine Seifert

The insurance company posted fourth quarter operating earnings per share of 47 cents vs. a 17-cent loss. S&P is dismayed at MetLife's earnings per share shortfall, which reflected a 23-cent net charge to boost asbestos reserves. But underlying results continued their momentum. Fourth quarter premiums and fees rose 15% and operating margins were aided by well-contained claim costs. Full 2002 operating earnings per share was $2.39 vs. $1.18. S&P is keeping its $2.80 operating earnings per share estimate for 2003, at the low end of MetLife's guidance. At nine times S&P's 2003 estimate, with prospects not tied to an economic recovery, MetLife is undervalued vs. peers.

Scholastic Corp. (SCHL): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: William Donald

The publisher of the popular Harry Potter book series sharply reduced its guidance for the second half of fiscal 2003 (May), citing lower-than-expected January revenue -- largely in the trade segment and school book clubs. Also, S&P thinks the fourth quarter could be hurt by school budgetary constraints and increasing uncertainty about the economic and geopolitical environment. S&P cut its fiscal 2003 earnings per share estimate to $2.00 from $2.50, and lowered fiscal 2004's estimate to $2.80 from $3.20. However, S&P thinks the current shortfalls are temporary and that fiscal 2004 will benefit from a new Harry Potter release scheduled for June 21.

Yum! Brands (YUM): Keeping 4 STARS (accumulate)

Analyst: Dennis Milton

The global restaurant operator reported December quarter earnings per share of 55 cents, before one-time gains -- a 3% increase from a year ago and two cents below S&P's estimate. Results were hurt by significant price discounting by rivals and higher-than-expected labor costs. For the year, earnings per share grew 16% to $1.87, before one-time events, propelled by Yum's expansion plan. At only 11 times S&P's 2003 earnings per share estimate of $2.05, Yum shares trade in-line with peers and at a significant discount to the market, despite the company's strong international growth opportunities. Yum's portfolio of quick-service restuarants include KFC, Pizza Hut, and Taco Bell.

El Paso (EP): Reiterates 1 STAR (sell)

Analyst: Craig Shere

The nation's largest pipeline company is replacing its 13-year CEO as the company refocuses its business. S&P says the decision is a positive move, given merchant power exposures, regulatory difficulties, and escalating liquidity problems. Chairman William A. Wise will remain CEO until a replacement is found, and remain head of the board till the end of 2003. A new CEO may influence capital expenditure plans, relationships with regulators, and discussions with creditors. But succession is not immediate and the identity of the new management is unknown. Last week's credit downgrade and rising margin requirements are further straining liquidity. Earlier this month, El Paso announced plans to cut its dividend and sell almost $3 billion in assets in 2003. The company also is defending itself against shareholder lawsuits and a finding that it withheld natural gas from California to drive up prices during the state's energy crisis.


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