Markets & Finance

S&P Ups AMR Corp. to Hold


American Airlines parent AMR Corp. (AMR), Northwest Air (NWAC) and Continental (CAL): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: James Corridore

With passenger demand picking up somewhat, S&P thinks investor sentiment toward airline stocks has shifted and that bargain-hunting has pushed S&P airline index up 15.3% this year. While S&P thinks AMR, Northwest, and Continental are likely to continue to lose money and underperform better-positioned lower-cost competitors, improved airfare environment could lead to lower losses and upside to loss targets. AMR's liquidity position has stabilized; this should make near-term bankruptcy less likely.

Circuit City (CC): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Amrit Tewary

Per an SEC filing today, Circuit City's board indicated that it was not interested in an $8 per share acquisition proposal from a group led by Mexico's Carlos Slim that has about a 9.2% stake. S&P believes this will likely put an $8 floor under Circuit City shares, and thinks there's a possibility of a higher bid by this group or a rival bidder. S&P believes members of the buyout group participated in the 2000 purchase of a majority interest in CompUSA, which adds credibility to the buyout proposal. Circuit City's p-e is at a large premium to the S&P 500, but S&P would hold shares for a possible higher bid.

Neuberger Berman (NEU): Upgrades to 3 STARS (hold) from 1 STAR (sell)

Analyst: Mark Basham

Neuberger is reportedly in talks with Lehman Brothers to be acquired for $3 billion. This price tag is equal to 5.33% of Neuberger's assets under management, as of March 31 -- well above the ratio of recent deals -- and is 20 times Neuberger's peak earnings in 2000. While press reports cite Lehman's desire to cultivate wealthy investors that are re-entering the stock markets, Neuberger assets were 45% invested in fixed-income securities at the end of March. Assuming the full vesting of outstanding stock options, the proposed $3 billion figure represents a 2% premium to a $39 price for Neuberger.

Lehman Brothers (LEH): Maintains 5 STARS (buy)

Analyst: Robert McMillan

S&P thinks Lehman's proposed $3 billion price for Neuberger Berman is a bit high, but says the cost may be justifiable on a good strategic fit that should help Lehman reduce its dependence on bond trading. Neuberger focuses on affluent investors and has $56.3 billion in assets under management. S&P expects Lehman shares, trading at 13 times S&P's fiscal 2003 earnings per share estimate of $5.22 and at discount to the S&P 500, to significantly outperform the market on continued good business momentum.

ConAgra Foods (CAG): Maintains 3 STARS (hold)

Analyst: Richard Joy

ConAgra posted May-quarter earnings per share before special items of 42 cents, vs. 34 cents, which is 2 cents above S&P's estimate. Full-fiscal 2003 (May) earnings per share was $1.63, vs. $1.47. May-quarter sales fell 33.5%, mostly because ConAgra divested its meat processing, canned seafood, and two cheese-processing businesses. Operating profit for packaged foods fell 4.3%, and dropped 35% for food ingredients. Agricultural products posted a profit recovery. S&P still sees fiscal 2004 earnings per share at $1.72.0 While earnings visibility is still lacking, S&P thinks ConAgra shares are worth holding, given the 4.2% dividend yield and the divestiture of its commodity businesses.

General Electric (GE): Maintains 3 STARS (hold)

Analyst: James Sanders, Robert Friedman

GE agreed to sell its GE Edison Life Insurance and U.S. auto and home business to American International Group for about $2.15 billion. The transaction is expected to be completed within 90 days pending regulatory approval. S&P thinks the proposed transaction will allow GE to focus on businesses with less volatility and more consistent revenue stream. The deal follows a $2.5 billion pretax charge incurred for GE's reinsurance business in the fourth-quarter of 2002. Despite S&P's favorable opinion of the deal, S&P is maintaining the 7.5%-8.5% estimate of GE's free-cash growth, which suggests an intrinsic valuation for the shares of $30.

American International Group (AIG): Maintains 3 STARS (hold)

Analyst: Catherine Seifert

Insurance giant AIG will pay between $2.1 billion and $2.2 billion for Edison Life, which is GE's Japan-based life insurance unit, as well as GE's U.S. personal lines property-casualty unit. This proposed acquisition should expand AIG's already strong presence in the Asian life-insurance market, and increase its scale in the U.S. personal lines market. But, this deal would further shift AIG's business mix to product lines with lower p-e multiples, while its shares trade at a premium p-e, vs. its peers.

Research In Motion (RIMM): Maintains 2 STARS (avoid)

Analyst: Kenneth Leon

Blackberry-device maker RIMM posted May-quarter sales at $104 million, a 46% increase from last year, and a narrowed loss per share of 11 cents, vs. 14 cents, after special items. Blackberry net subscribers rose 81,000, to a 615,000, slightly above S&P's forecast. May-quarter gross margin narrowed to 45.6%, from the February quarter's 46.7%. Excluding special items, S&P sees fiscal 2004 (Feb.) earnings per share of 3 cents, and sees fiscal 2005's at 50 cents. With patent-litigation suits looming and RIMM shares trading at 46 times S&P's fiscal 2005 estimate -- much higher than peers -- S&P continues to recommend avoid.


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