Markets & Finance

S&P Starts California Pizza with Buy


California Pizza Kitchen (CPKI): Initiates with 5 STARS (buy)

Analyst: Dennis Milton

California Pizza Kitchen operates about 140 restaurants with a focus on the premium pizza segment. The company sees potential for 350 units in the U.S. S&P expects the number of stores to grow at about 15% annually over the next several years. At 21 times S&P's 2003 earnings per share estimate of $1.00, shares trade at a slight premium to peers. S&P doesn't think this valuation adequately reflects the company's growth potential. S&P's discounted cash-flow model, which assumes annual earnings per share growth of 15% to 20% over the next several years, intrinsically values shares at $35.

Goodyear Tire (GT): Maintains 2 STARS (avoid)

Analyst: Efraim Levy

Goodyear and the United Steelworkers union broke off contract talks. The union rejected Goodyear's latest offer. Either side must give 72 hours before terminating the contract. S&P thinks a settlement will ultimately be reached, as neither side can afford a strike. The already struggling Goodyear needs to be able to reduce its costs. S&P believes Goodyear faces headwinds, including high raw material costs, as it restructures. S&P sees a 95-cent loss in 2003 and believes Goodyear has far to go to improve its financial condition.

LSI Logic (LSI): Maintains 3 STARS (hold)

Analyst: Thomas Smith

LSI decided to sell its Tsukuba, Japan wafer plant and accelerate the disposition of its Colorado Springs plant. The company also announced June-quarter revenue tracking toward the top of the 4-10% guided range. It expects a June-quarter pro forma loss of 6 cents to 8 cents, which is 4 cents narrower than the prior guidance. LSI's GAAP loss expectation widens on higher charge estimates. S&P now estimates a pro forma loss for 2003 of 20 cents, vs. the prior estimate of a loss of 25 cents. S&P maintains its 2004 earnings per share estimate of 20 cents, and thinks LSI's stearnings per share to alleviate its overcapacity problem are in the right direction.

Jack Henry (JKHY): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Markos Kaminis

Based on valuation, S&P is downgrading the shares to hold. The shares, at 30 times S&P's calendar 2003 earnings per share estimate of 60 cents, trade at a modest premium to Jack Henry's mid-cap software and services peers. Also, S&P's valuation of discounted cash flows indicates an intrinsic value range of $16-$17 a share. S&P believes the key catalyst for the shares' price appreciation this year was the March quarter backlog growth. Although this forward indicator may be a sign of a return of sustainable demand among Jack Henry's banking clients, S&P view the shares as fairly valued.

Electronic Data Systems (EDS): Reiterates 2 STARS (avoid)

Analyst: Richard Stice

On Monday data-storage giant EDS reaffirmed its June 18 full-year 2003 free-cash flow guidance of $400 million to $600 million, vs. 2002's total of $1 billion. The company does expect second-quarter free cash flow to be lower than previously announced, due to a delay in the receipt of a $98 million payment from MCI. The fee is now expected to be recorded in July. EDS continues to trade at a discount to the S&P 500 and its historical average on a p-e basis. However, given S&P's view of increasing competitive pressures, restructuring challenges, and an unresolved Securities and Exchange Commission investigation, S&P would avoid the shares.

RealNetworks (RNWK): Maintains 2 STARS (avoid)

Analyst: Scott Kessler

RealNetwork shares rose following an announcement Sunday that it would be providing Vodafone, the world's largest provider of wireless-phone services by subscribers, with technology to enable audio and video offerings. RealNetwork's Helix software will be licensed for an undisclosed sum to Vodafone Live customers, which account for less than 1% of Vodafone's subscribers. With what S&P views as increasing competition, an above-peers' valuation on both a p-e and p-e-to-growth basis, a pending dilutive convertible offering, and the absence of a CFO, S&P says avoid the shares.

Ashland (ASH): Maintains 3 STARS (hold)

Analyst: Tina Vital

Construction contractor Ashland announced Monday that it has agreed to sell the net assets of its Electronic Chemicals business (annual sales near $200 million) and certain related subsidiaries to Air Products for about $300 million before tax. The transaction is expected to close within 60 days. Ashland's after-tax proceeds from the sale is expected to be used to repay debt. The proposed deal is a part of Ashland's ongoing profitability plan, designed to improve the company's returns and earnings growth. S&P expects additional non-core asset sales across Ashland's business lines to be forthcoming.


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