Markets & Finance

S&P Cuts Delta to Sell


Delta Air (DAL): Downgrades to 1 STAR (sell) from 2 STARS (avoid)

Analyst: James Corridore

Delta reported that soft traffic and bookings will cause cash flow from operations to be negative in the first quarter, compared with earlier guidance of slightly positive cash from operations. Given Delta's extremely high debt level, limited access to capital markets, and worsening industry conditions, S&P finds it likely that the stock will continue to materially underperform the market and may continue to drop in price. S&P expects Delta to lose $6.75 a share in 2003, and it is likely to lose money in 2004 as well. If the U.S. goes to war with Iraq, S&P's loss estimate for Delta will undoubtedly rise sharply.

Maytag (MYG): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Efraim Levy

Maytag warned that lower appliance demand could result in operating income that is about 25% below its plan. The biggest factor in the shortfall was declining volume and a poorer margin mix in its Hoover's floor care segment. S&P now expects appliance industry volume growth for 2003 to be below the 1% to 4% forecast, and is putting its 2003 earnings per share estimate of $3.18 under review. Although Maytag had been trading at the lower end of its historical price-earnings range, with reduced earnings visibility, S&P doesn't expect Maytag to outperform.

Continental (CAL), Northwest (NWAC) and America West (AWA): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: James Corridore

S&P is also downgrading these three airlines to 2 STARS based on poor advanced bookings and rising fuel prices. In addition, the Air Transport Association released a report Tuesday estimating industry losses of $7 billion to $13 billion in 2003 if the U.S. goes to war with Iraq. Even if a war is averted, S&P estimates the industry will lose $6.5 billion. Despite efforts to control costs, S&P says increased security and insurance costs, low airfares, and reduced passenger demand are making it impossible for the airlines to cut losses. Without government intervention, S&P sees a rising risk of bankruptcy.

King Pharmaceuticals (KG): Maintains 3 STARS (hold)

Analyst: Herman Saftlas

King disclosed that it has received a Securities and Exchange Commission subpoena requesting documents related to sales of King's products to VitaRx and Prison Health Services during 1999 and 2000, as well as all documents related to the pricing of King's drugs to government Medicaid agencies during 1999. The subpoena also focuses on rebates of its Altace hypertension drug since 2000. Management says it is unaware of any wrongdoing. The obvious suspicion is that the inquiry may relate to a possible overcharge of Medicaid. However, S&P thinks King should be able to weather this storm. It's one of the largest specialty drugmakers, earning $332 million on sales of $1.2 billion last year. Its depressed shares are selling at seven times the $1.65 1earnings per share S&P sees for 2003, vs. the group's average price-earnings multiple of 18.

Nokia (NOK): Reiterates 5 STARS (buy)

Analyst: Ari Bensinger

Nokia sees March quarter earnings per share at 15 euro cents to 17 euro cents, at the low end of the prior guidance of 15 euro cents to 19 euro cents. The warning largely reflects weaker-than-anticipated network division sales. S&P expects the networks division (20% of sales) to struggle throughout 2003 and is lowering the 2003 earnings per share estimate to 82 cents from 88 cents. Still, S&P thinks investors should focus on the core handset division (80%), which continues to gain market share and enjoys an industry leading 24% operating margin. S&P would buy Nokia at a notable discount to the $19 fair value, based on S&P's discounted cash flow model.

IBM Corp. (IBM): Reiterates 4 STARS (accumulate)

Analyst: Megan Graham Hackett

IBM's 2002 annual report shows that its reported earnings per share for 2002 of $2.06 would have been $1.39 if stock options were expensed. The 67-cent impact to earnings per share compares with S&P's projection of 68 cents. For 2003, S&P still projects a 72-cent impact to earnings per share from the inclusion of stock option expenses. As noted before, IBM lowered its expected return on its pension plan assets to 8% for 2003, and in the fourth quarter of 2002, voluntarily fully funded the qualified portion of its pension plan. At a price to sales ratio of 1.6, below peers, S&P views IBM shares as attractive.

Gilead Sciences (GILD): Reiterates 5 STARS (buy)

Analyst: Frank DiLorenzo

Gilead received European Union approval for Hepsera (already approved in the U.S.) to treat hepatitis B. This follows on the heels of a February announcement that the EU's Committee for Proprietary Medicinal Products recommended the use of Viread anti-HIV in the treatment of naive patients. S&P expects this fundamentally positive news to continue with the FDA approval of emtricitabine anti-HIV by the second half of 2003. S&P still sees 2003 earnings per share at 81 cents, but sees upside potential. Using S&P's Core earnings per share methodology, the estimated options expense would reduce 2003 earnings per share by 20 cents. On a discounted cash flow basis, S&P considers Gilead worth $45 to $50.


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