Markets & Finance

S&P Downgrades Wal-Mart to Accumulate


Wal-Mart (WMT): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Jason Asaeda

S&P is trimming its recommendation of the world's largest retailer as the stock nears S&P's intrinsic value estimate of $61, based on S&P's discounted cash flow analysis. Same-store sales rose 4.6% in April, and Wal-Mart sees May same-store sales up 1%-3%, slightly lower than S&P had anticipated. April quarter results should meet S&P's 42 cents earnings per share estimate. Wal-Mart expects the sale of its wholly owned McLane distribution business to be dilutive to fiscal 2004 (Jan.) earnings per share by a penny per share. With this modest impact, S&P is keeping its fiscal 2004 earnings per share estimate at $2.02. At 27 times that estimate, Wal-Mart remains attractive.

Nextel Communications (NXTL): Reiterates 5 STARS (buy)

Analyst: Kenneth Leon

Shares of this wireless carrier have come under pressure Thursday. S&P thinks some investors' concerns focuses on competitive risks. The new push-to-talk service releases from Sprint PCS and Verizon may come as early as this summer. The timing is uncertain, but S&P thinks Nextel's subscriber base is loyal, with below-average churn. New service offerings will need to show the same high-quality service as Nextel. Concerns about the FCC's delay in approving a radio spectrum swap proposal shouldn't hurt 2003 results. Shares are trading below the market at 14 times S&P's 2003 estimate of 97 cents, and S&P thinks the weak price is a buying opportunity.

Comcast (CMCSK): Reiterates 5 STARS (buy)

Analyst: Tuna Amobi

S&P reiterated its buy rating on both Class A and special (non-voting) shares. The cable TV giant is showing robust high-speed data run rates, as well as surprising basic subscriber gains. First-quarter (pro forma) revenues grew 9.6%, and EBITDA grew 31% -- both above S&P's projections. But the 13-cent GAAP loss was impacted by depreciation and amortization expenses, and interest expenses. Overall, early gains from the AT&T Broadband integration are exceeding S&P's expectations. Comcast's aggressive de-leveraging plan also is on track. Even with heavy capital spending at AT&T Broadband -- Comcast has targeted a 98% two-way access upgrade plan this year -- Comcast could see positive 2003 free cash flow, as traditionally defined. S&P says the stock is compelling.

Cephalon (CEPH): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Frank DiLorenzo

Drug maker Cephalon's first-quarter sales of $138 million were $9 million below S&P's view. Proforma earnings per share of 21 cents was in line with S&P's view. Cephalon is keeping the full-year 2003 earnings guidance of $1.50 per share, on sales of $650 million to $660 million. Still, Cephalon's second-quarter earnings guidance of 30 cents per share on $155 million in sales is below S&P's expectation. As a result, S&P is cutting the sales forecast to $651 million for 2003, from $668 million. Also, S&P is keeping the earnings per share estimate at $1.51 for 2003, but reducing the 2004 estimate to $2.05, from $2.08. S&P thinks Cephalon is undervalued based on a net present value analysis, but now has less confidence in its forecasts and the growth potential of narcolepsy drug Provigil.

Whole Foods Market (WFMI): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Joseph Agnese

Whole Foods posted March quarter earnings per share of 41 cents, vs. 34 cents, in line with S&P's estimate. Sales rose 16%, on 7% growth in comparable store sales, below S&P's expectations. Whole Foods expects comp-store sales to remain at the low end of the 6.5% to 8.5% guidance range for the remainder of the year. While S&P thinks gross margins may be pressured by price reductions, margins should benefit as the grocery chain leverages its operating expenses against a larger store base. Shares are trading at 36 times S&P's fiscal 2003 (Sep.) earnings per share estimate of $1.64, above peers and the historical average. S&P is taking a more cautious stance and is reducing the sales growth expectations.

Pixar (PIXR): Maintains 2 STARS (avoid)

Analyst: Mark Basham

The movie animation company posted first-quarter earnings per share of 15 cents, vs. 30 cents, beating S&P's estimate of 10 cents after a revision of home video distribution expenses by partner Disney added 3 cents to earnings per share. Pixas said during a conference call that part of its profits from international theatrical and home video releases during the coming holiday season of Finding Nemo will be recognized in 2004. This leads S&P to lower its 2003 earnings per share estimate to $1.25, from $1.60. S&P sees 2004 estimates at $1.10, since the next scheduled film, The Incredibles, should largely be reflected in 2005. At 53 times the 2004 estimate, Pixar is trading at a big premium to the S&P 500 and to the filmed entertainment peer group.


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