Markets & Finance

S&P Says Hold Tyco


Tyco International (TYC): Reiterates 3 STARS (hold)

Analyst: James Corridore, Michael Jaffe

In a meeting with investors Thursday and in an 8-K filing Wednesday night, Tyco announced it will take charges of $265 million to $325 million for issues related to its Fire and Security Services business unit, and has replaced the head of that unit. The company reduced its fiscal 2003 (Sept.) earnings per share guidance to $1.40 to $1.50 before extraordinary charges, still in line with the Street's current mean of $1.49. Despite continued turmoil, S&P feels shares are O.K. to hold, based on continued earnings per share, its plans to clean house, strength at its electronics and healthcare units, and strong generation of free cash flow.

AmerisourceBergen (ABC): Downgrades to 2 STARS (avoid) from 5 STARS (buy)

Analyst: Phillip Seligman

IMS's reduction of its 2003 and 2004 prescription drug growth forecast suggests that the company, which has matched its revenue growth target to IMS forecasts, will do likewise. Assuming its revenues are now at the low end of the 11% to 14% growth it previously guided for fiscal 2003 (Sept.), achieving its 20% earnings per share growth target in fiscal 2003 and 2004 is possible but the challenges are significantly tougher. Hence, S&P cut the fiscal 2003 estimate by five cents to $3.90 and would avoid the shares until revenue growth picks up or the company proves its 20% earnings per share growth target is achievable.

Royal Philips Electronics (PHG): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Thomas Graves

S&P looks for Philips Electronics shares to get further support from the company's plan to improve semiconductor business profitability. However, S&P sees at least a couple more quarters of losses in semiconductors. For the entire company, before plant-closing charges, S&P is trimming the 2003 earnings per share estimate to 42 cents, from 45 cents. After adjusting for the estimated value and profit levels of various Philips joint venture and equity holdings, the stock is still at a premium price-earnings multiple to the S&P 500, based on 2003 estimates. But S&P looks for the stock to be bolstered by the prospect of a sizeable earnings per share rise in 2004.

Fannie Mae (FNM): Maintains 4 STARS (accumulate)

Analyst: Erik Eisenstein

Fannie Mae posted solid February data. Its mortgage portfolio grew at a relatively modest 9.5% pace, but retained commitments more than doubled during the month. Its net interest margin has remained wide longer than expected, though contraction is seen in the coming months. The asset/liability duration gap widened slightly, to -5 months from -4. March and April may present more of a test in this regard, with heavier refinancing activity expected. Still, S&P is raising the 2003 operating earnings per share estimate by 10 cents, to $7.21. Fannie Mae is attractive at a historically low price-earnings valuation.

Comverse Technology (CMVT): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Ari Bensinger

Before special charges, Comverse posted a January quarter loss per share of eight cents vs. six cents earnings per share -- two cents above S&P's estimate. However, the upside largely reflects higher interest income due to foreign exchange gains. Sales rose 5% from the October quarter, at the high end of prior guidance. The backlog increased an impressive 61% sequentially. Based on the increased order activity, S&P thinks Comverse can reach profitability by the end of fiscal 2004 (Jan.). At a below-peer-average 1.2 book value, with over $10 cash per share and an improved outlook, S&P is taking a more positive stance.

International Paper (IP): Maintains 3 STARS (hold)

Analyst: Bryon Korutz

With higher energy costs and poor weather conditions in the South, as well as seasonally weaker demand, International Paper stated that first quarter earnings per share would be comparable to last year's earnings per share of 12 cents. Accordingly, S&P is cutting the first quarter estimate to 12 cents, from 20 cents, and is lowering the optimistic full-year estimate to $1.42, from $1.70. International Paper also unveiled a three-year plan to focus on growing the top line through higher volumes and mix, lowering its selling, general, and administrative costs, and improving operations and its supply chain. S&P is encouraged by continued cost cuts. But shares are trading at about 17 times S&P's 2004 estimate of $2.00.


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