Hasbro (HAS): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)
Analyst: Thomas Graves
Before unusual items, the toy maker's fourth quarter earnings per share of 42 cents vs. pro forma 39 cents topped estimates. S&P is pleased by a slight revenue gain, margin improvement, and balance sheet strengthening. S&P also is raising its 2003 earnings per share estimate to 91 cents, from 82 cents. S&P expects further debt reduction, and looks for the company to grow core brands, with less reliance on licenses. Future cash flow could be helped by a reduced minimum guarantee for the Star Wars license. Hasbro shares are attractive at a price-earnings discount to rival Mattel and the S&P 500.
Alltel (AT): Maintains 5 STARS (buy)
Analyst: Todd Rosenbluth
Following its industry conference presentation, S&P continues to believe the company is the best in S&P's telecom coverage group. The stock has fallen 15% this year despite generating strong fourth quarter results and having wireless and wireline EBITDA margins ahead of most of its peers. Unlike the Bells and AT&T, rural carrier Alltel's longer-term prospects are not dependent upon the Federal Communications Commission's vote next week on the rules of unbundled network element-platform (UNE-P), a controversial resale method that allows AT&T, MCI, and smaller companies to provide local phone service at a cost determined by state regulators. With a solid balance sheet and only a modest pension impact, S&P would buy Alltel at a below-peers EBITDA multiple and 14 times S&P's 2003 earnings per share estimate of $3.16.
Fox Entertainment Group (FOX): Maintains 4 STARS (accumulate)
Analyst: Tuna Amobi
Fox posted 32 cents vs. 54 cents second quarter earnings per share, four cents above Street estimates. With strong 15% growth in revenues and 69% in EBITDA, Fox should ride more digital video discs (DVD) momentum from theatrical successes. Also, recent gains in ratings should aid television advertising revenues, outweighing rising broadcast programming costs. With added syndication gains at 20th Century Fox and strong cable affiliate fees, fiscal 2003 (June) EBITDA growth could exceed 40%. Though S&P is wary of a war-induced ad pullback, Fox is attractive at an enterprise value of 12 times S&P's estimate of fiscal 2003 EBITDA, on par with rival Viacom.
Fannie Mae (FMN): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)
Analyst: Erik Eisenstein
As expected, Fannie Mae posted strong January portfolio growth as it purchased loans that it is committed to during a torrid fall mortgage season. And its net interest margin moved up considerably. While this is likely a temporary move, the result has prompted S&P to raise the 2003 earnings per share estimate by six cents, to $7.14. The asset/liability duration gap narrowed, from -5 months to -4 months, within a reasonable range. S&P still thinks the interest rate risk is above average at the moment. But at less than nine times S&P's 2003 earnings per share estimate, a very low historical price-earnings range, S&P views Fannie Mae as attractive.
Office Depot (ODP): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)
Analyst: Yogeesh Wagle
The company reported fourth quarter earnings per share of 23 cents vs. 16 cents, before one-time charges, in line with estimates. Total sales rose 2%, but North American retail same-stores sales declined 4%. S&P expects negative same-store sales comparisons in the first half of 2003 as Office Depot's core customers -- small to medium businesses -- continue to be cautious in their purchasing. Further international penetration, mainly in Europe, should drive overall 3% sales growth in 2003. At a price-earnings-to-growth ratio of 1.1, which is based on S&P's $1.13 2003 earnings per share estimate, above peers, S&P views the shares as fairly priced.
PacifiCare (PHSY): Downgrades to 2 STARS (avoid) from 3 STARS (hold)
Analyst: Phillip Seligman
PacifiCare posted fourth quarter pro forma earnings per share of 97 cents vs. 76 cents (FAS 142-adjusted) -- three cents above S&P's estimate. It reiterates 2003 guidance of earnings per share $4.25 to $4.35 on 1% to 2% lower operating revenue as the culling of unprofitable accounts outweighed higher premium rates and more profitable commercial enrollment. A turnaround seems to have taken hold. But many clouds remain, including heavy exposure to Medicare and capitation, a Texas legal battle, and a lack of 2004 visibility. S&P's estimate of 2003 S&P Core earnings per share, after a stock option expense but with no pension charge, is 3.7% below S&P's $4.35 GAAP estimate.