Markets & Finance

S&P Keeps Strong Buy Sovereign Bank


Sovereign Bancorp (SOV): Maintains 5 STARS (buy)

Analyst: Erik Eisenstein

At an analysts' meeting Wednesday, Sovereign reiterated the 2003 earnings per share guidance from its first-quarter conference call a few weeks ago. It hedged slightly on its 2005 earnings per share goal of $2.00, first issued back in 2001, implying that meeting this goal depends on some degree of economic recovery. S&P expects a more vibrant economy by 2005 and is not concerned. Also, S&P believes Sovereign is well positioned for an economic recovery, with limited risk, should weakness persist. S&P is leaving the 2003 operating earnings per share estimate at $1.44. With projected intermediate-term earnings per share growth above peers and a p-e near peers, Sovereign is attractive.

Applied Biosystems (ABI): Downgrades to 1 STAR (sell) from 2 STARS (avoid)

Analyst: Frank DiLorenzo

The stock has rallied along with the biotech sector. However, S&P thinks weakness in its operating results will continue because of a slowdown in government funding, consolidation, a lack of emerging biotech funding, and cost containment by drug firms. On a relative valuation basis and using S&P's earnings per share estimates, Applied Biosystems's p-e-growth ratio of 1.8 is well above S&P's peer group ratio of 1.2 times for calendar 2003. S&P thinks other biotechs and life science instrument and supply firms have better growth prospects and cheaper valuation multiples, and S&P would look elsewhere.

Lamar Advertising (LAMR): Reiterates 1 STAR (sell)

Analyst: Tuna Amobi

Before a 7-cent loss on debt extinguishment, Lamar posted a first-quarter loss per share of 13 cents vs. a loss of 16 cents -- 3 cents better than the Street's mean. However, free cash flow per share fell 14% to 28 cents. Bulletin occupancies, and to a lesser extent, poster occupancies, continue to trend well below normal levels. As a result, this highly leveraged, pure outdoor advertising operator sees second-quarter revenues about flat and EBITDA down. S&P is widening the 2003 loss estimate by 4 cents to 22 cents. While outdoor advertising should recover in the second half of 2003, S&P sees much downside to the stock at an enterprise value of 15 times S&P's 2003 EBITDA estimate.

Cisco Systems (CSCO): Maintains 5 STARS (buy)

Analyst: Megan Graham Hackett

Cisco posted April quarter operating earnings per share of 15 cents, vs. 11 cents -- a penny above the Street's mean. Earnings per share quality was solid. Surprises include gross margin of 70.8%, and expense controls. Revenues of $4.6 billion, down 2% from the January quarter, met S&P's projection. Cash from operations was a healthy $1.3 billion. Cisco sees July-quarter revenues flat vs. the April quarter, and sees bookings up slightly, as well as gross margin of 68% to 70%. S&P is upping the fiscal 2003 (July) estimate by 2 cents, to 58 cents. S&P's Core Earnings per share are 37 cents. With $20 billion in cash and investments, and with shares trading below the intrinsic value of $17.50 -- based on discounted cash flow and price-to-sales analysis -- S&P thinks this maker of networking gear for the Internet is attractive.

Electronic Arts (ERTS): Maintains 4 STARS (accumulate)

Analyst: Jonathan Rudy

Video game maker Electronic Arts posted fourth-quarter earnings per share of 40 cents, vs. 39 cents, excluding one-time charges -- 6 cents better than the Street's estimates. Revenues declined 1% to $463 million, also better than estimates. Gross margin widened to 65%, from a year ago's 57%. Sales were driven by Sims, Lord of the Rings, Command & Conquer, and FIFA Soccer 2003. S&P sees 17% revenue growth in fiscal 2004 (Mar.), and is raising the fiscal 2004 earnings per share estimate to $3.14, from $2.81. Trading at a discount to the overall market, at a p-e-to growth rate of 1, and with about $10.80 per share in cash and investments -- and no debt -- S&P thinks this industry leader remains attractive.


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