Markets & Finance

S&P Upgrades AOL to Accumulate


AOL Time Warner (AOL): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Tuna Amobi

AOL posted eight cents first quarter operating earnings per share on 9% core EBITDA growth, vs. a year-ago's earnings per share of nine cents, generally above expectations. AOL's networks and entertainment businesses should drive modest 2003 EBITDA growth. Gains from new broadband initiatives could make an expected near-term contraction at the AOL division much less than feared. AOL seems on track to meet its near-term debt service targets. But government probes are unresolved. Still, with $3.4 billion to $3.5 billion of likely 2003 free cash, aided by an advertising rebound, and with high beta and revised long-term earnings per share growth, S&P says its discounted cash flow model suggests a $16.20 value. Shares are currently trading just above $14.

Sigma-Aldrich (SIAL): Maintains 4 STARS (accumulate)

Analyst: Richard O'Reilly

The chemical maker posted first quarter earnings per share of 68 cents, above consensus, vs. 58 cents earnings per share -- helped by a lower tax rate and a 6-cent benefit from currency rates. Sales grew 11%; excluding the impact of foreign exchange, however, sales rose just 2.5%, all from higher prices. Domestic sales fell due to reduced sales from the drug industry, but international sales (55% of total) are continuing to grow well. S&P expects sales growth to pick up during 2003 due to new marketing programs, and an expanded sales force. S&P is raising its 2003 earnings per share estimate to $2.60 from $2.55. Despite a premium p-e multiple to the market of 18 times 2003 estimates, S&P thinks Sigma-Aldrich is attractive.

Cardinal Health (CAH): Reiterates 5 STARS (buy)

Analyst: Phillip Seligman

The medical products maker posted March quarter operating earnings per share of 86 cents, vs. 71 cents -- in line with estimates. S&P thinks Cardinal Health is oversold Wednesday as the slowdown in drug trading (as makers cut excess inventory in the channel) masks the company's healthy core drug distribution growth. S&P thinks comp-sales should improve with the eventual year-over-year lapping of the trading business' deterioration. In S&P's view, Cardinal Health should be seen as a diversified company, with reduced trading freeing up capital for its other more promising segments. Cardinal Health is compelling at 14 times S&P's fiscal 2004 (June) estimate of $3.85, vs. the expected 20%-plus long-term earnings per share growth.

AT&T (T): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Todd Rosenbluth

AT&T posted first quarter earnings per share of 67 cents vs. 60 cents, before a 6-cent accounting change gain, beating S&P's estimate. Results were also boosted a 5-cent, one-time tax benefit. However, revenues were down only 5.9%, with relative strength in the business segment. EBITDA margins narrowed less than S&P anticipated, and S&P is encouraged by AT&T's plans to offer competitive local service in more states by the end of the year. S&P sees 2003 earnings per share at $2.22 and 2004's at $1.81. Despite the risks for the long-distance business, S&P thinks AT&T is at an appealing discount to peers, based on its p-e and the ratio of its enterprise value to EBITDA.

AmeriCredit (ACF): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Robert McMillan

S&P is upgrading AmeriCredit on the expectation that credit quality may be generally improving, even in the sub-prime area, as lenders tighten standards. S&P noted Tuesday that delinquencies in the auto finance business of one of AmeriCredit's competitors improved considerably in the first quarter, although credit losses had edged up slightly. S&P thinks that AmeriCredit's shares, trading at nine times S&P's fiscal 2004 (June) 49 cents earnings per share estimate, will perform in line with the market over the next 6 to 12 months.

Amgen (AMGN): Maintains 5 STARS (buy)

Analyst: Frank DiLorenzo

The biotech and pharmaceutical firm posted proforma earnings per share of 42 cents -- in line with S&P's estimate. Product sales of Epogen/Aranesp were $802 million, about $20 million above S&P's view. Neupogen/Neulasta sales of $564 million were $22 million below S&P's view. Enbrel sales of $274 million were $32 million above view. Amgen raised its product sales guidance to between $7.1 billion to $7.6 billion for 2003, from $6.7 billion to $7.2 billion. S&P is raising its product sales forecasts to $7.3 billion for 2003 (from $6.9 billion) and to $8.8 billion for 2004 ($8.4 billion). S&P also is upping the earnings per share to $1.85 in 2003 (from $1.78) and to $2.30 in 2004 (from $2.20). On a discounted cash flows, S&P thinks the shares are worth about $72.


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