Markets & Finance

S&P Lowers R.J. Reynolds to Avoid


R.J. Reynolds (RJR): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Howard Choe

Although the tobacco manufacturer reported first quarter earnings per share of 84 cents -- 4 cents higher than S&P expected, it drastically lowered its outlook for the remainder of 2003 largely because of deep-discount competition. Sales fell 20% and and EBIT fell 55%. S&P projects 2003 sales and EBIT to fall 9% and 49%, respectively, and has lowered the 2003 earnings per share estimate to $3 from $4.66. R.J. Reynolds will suspend its share repurchases. The dividend appears secure for now, but the diminished outlook for cash-flow growth is worrisome. In addition, with a revised p-e-at a significant premium to Altria, which owns the Philip Morris USA tobacco unit, S&P sees R.J. Reynolds underperforming.

AMR Corp. (AMR): Maintains 2 STARS (avoid)

Analyst: James Corridore

CEO Don Carty stepped down to be replaced by former Sears CEO and current director Edward Brennan as interim Chairman, and by Gerard Arpey, current president, as CEO. This move is to rebuild employee confidence in management after the revelation that executives were to get bonuses and pension protection. Following Carty's departure, pilots, mechanics -- and reportedly, flight attendants -- have again agreed to give-backs, helping the airline to again avert a bankruptcy. But S&P says even though flight attendants approved the new contract, there's a significant chance that AMR will file for Chapter 11 protection in the next 6 months to 12 months.

Flextronics /b> (FLEX): Reiterates 5 STARS (buy)

Analyst: Richard Stice

Flextronics posted March quarter earnings per share before amortization and restructuring charges of 5 cents, vs. 12 cents -- a penny below the Street's estimates. Revenues declined 21% from the December quarter, due to end-market slowdown and seasonal factors. Flextronics, a provider of electronics manufacturing services, is expecting the pricing environment to improve; he sees fiscal 2004 margins being boosted by increase in design-related contracts. S&P is reducing its fiscal 2004 (Mar.) earnings per share estimate by 9 cents, to 38 cents. However, S&P thinks Flextronics remains attractive given its favorable industry position, ongoing market share gains, and with shares trading at a discount to peers on price-sales basis.

Starbucks (SBUX): Maintains 1 STAR (sell)

Analyst: Dennis Milton

Seattle coffee chain Starbucks posted March quarter earnings per share of 13 cents vs. 11 cents -- a penny below S&P's estimate. Revenues grew 22%, mostly on more stores in operation and same-store sales growth of 7%. Margins were slightly narrower, reflecting higher operating costs. Starbucks shares trade at 36 times S&P's fiscal 2003 (Sep.) earnings per share estimate of 67 cents (trimmed by a penny), well above the market. S&P doesn't think this valuation is justified, given Starbuck's slowing long-term growth rate. Also, in S&P's view, the company faces difficult same-store sales comparisons over the next year, increasing downside risk to shares in the near term.

Apria Healthcare (AHG): Maintains 4 STARS (accumulate)

Analyst: Michael Santicchia

Apria, a provider of home healthcare services, posted first quarter earnings per share of 50 cents vs. 41 -- a penny above the Street's consensus. Top-line growth was 11%, reflecting strength in respiratory therapy products, gains in home medical equipment, and the acquisition of seven businesses. Cash flow from operations was $58 million. With strong cash flow generation, Apria continues to pursue both internal growth and acquisitions to increase market penetration. The shares are trading at 11 times S&P's 2003 earnings per share of $2.11, which represents a discount to the healthcare distribution and services industry's p-e of 14.

Mentor Graphics (MENT): Maintains 4 STARS (accumulate)

Analyst: Richard Tortoriello

The chip equipment maker posted first quarter earnings per share of 11 cents, before 6 cents of charges, vs. 9 cents, on a 25% sales rise, in line with S&P's estimate and 2 cents above the Street. Bookings rose a solid 33% on strength in circuit board design tools, plus physical verification, embedded software, and emulation tools. S&P thinks Mentor is gaining share in its niche markets, particularly in Europe. S&P still sees still 2003 earnings per share at 60 cents, and given S&P's forecast of overall electronic design automation growth in late 2003 and 2004, S&P sees 84 cents in 2004. With a 2003 p-e-to-growth ratio of 1.1, vs. 1.0 for the S&P MidCap 400, Mentor is attractive.

American Express (AXP): Maintains 4 STARS (accumulate)

Analyst: Robert McMillan

The travel and financial services firm posted first quarter earnings per share of 53 vs. 46 topped expectations. Strength in the card business, driven by relatively strong consumer and small business spending, and in the international banking business, offset weakness in the corporate travel and entertainment business as well as in the financial advisory business, where total assets under supervision dropped 10% due to continued weak stock market conditions. Good expense controls also helped profitability. S&P sees American Express shares outperforming the market, driven by continued earnings growth. S&P also is reviewing its estimates.


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