Markets & Finance

S&P Says Still Accumulate Alcan


Alcan (AL): Maintains 4 STARS (accumulate)

Analyst: Leo Larkin

Alcan shares are down following the news the Canadian aluminum company has made a hostile bid for French aluminum producer Pechiney. The offer, composed of 60% cash and 40% shares, is valued at about $5.5 billion, including debt assumed. The proposed transaction would make Alcan the world's second-largest aluminum producer with an enhanced position in packaging. Alcan anticipates it could achieve a $250 million savings run rate by the end of 2006 and expects the merger to be accretive to 2004 earnings. S&P thinks the merger, if completed as planned, would be good for the industry and reduce Alcan's earnings volatility.

United Natural Foods (UNFI): Reiterates 4 STARS (accumulate)

Analyst: Joseph Agnese

S&P is raising its fiscal 2004 (July) earnings per share estimate to $1.45, from $1.40, in line with the company's new guidance issued Monday of $1.42-$1.46. S&P sees sales growing 15%, benefiting from the expansion of a customer base and increased penetration of existing accounts. Margins should widen as United Natural Foods experiences efficiency gains from the integration of acquisitions and with the expansion of the New Hampshire distribution center. Although trading at 21 times S&P's calendar 2003 earnings per share estimate of $1.32 -- above the peer group's average -- S&P thinks United Natural Foods is attractive based on S&P's estimated 19% long-term earnings per share growth rate.

Sourcecorp (SRCP): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Mark Basham

Sourcecorp shares rose about 50% in the second quarter, which S&P attributes, aside from the market's rally, to positive sentiment generated from the 47 cents first-quarter earnings per share, vs. the Street's estimate of 44 cents. S&P notes that the first quarter benefited from a shift in the revenue mix to more projects and lower recurring revenues, as well as a recovery of written-off receivables. Beginning in the second quarter, Sourcecorp lost the New York City Human Resources Administration contract. S&P also has mixed views of its acquisition strategy, where results have been disappointing. S&P's 12-month price target is $18, based on a discounted cash flow analysis.

Pixar (PIXR): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Mark Basham

Pixar's top U.S. box office hit Finding Nemo has exceeded S&P's expectations. S&P sees the final box-office tally in the $300 million range, vs. the prior projection of about $250 million. S&P also is increasing the holiday DVD/video sales forecast and the foreign box-office estimate. S&P is raising its estimates for 2003 to $1.50 earnings per share, from $1.25, and for 2004 to $1.25, from $1.10. S&P's 12-month price target is $58-$62, based on a discounted cash flow, and reflects a more favorable film distribution pact for movies after 2005, plus a rise in production after 2010 to two films per year.

Liberty Media (L): Maintains 4 STARS (accumulate) and Comcast (CMCSA): Maintains 5 STARS (buy)

Analyst: Tuna Amobi

Liberty will buy 57% stake in Comcast's leading cable-channel retailer QVC for $7.9 billion, subject to necessary approvals, raising Liberty's stake in QVC to 98%. At Liberty's option, the consideration is payable in stock, a 3-year note, cash, or a combination thereof. S&P views the planned deal as win-win for both companies. Comcast would focus on its core cable operations, using proceeds to pay down debt. Liberty would make progress in acquiring cash-rich operating businesses, however, the deal raises concerns about Liberty's ability to fund its bid to buy Vivendi Universal.

Apache (APA): Maintains 5 STARS (buy)

Analyst: Tina Vital

Apache shares rose over 2% on July 3, on news it bought 26 Gulf of Mexico oil and gas fields, covering 50 blocks, effective July 1, from Shell Exploration and Production. The fields have proven reserves of 164 billion cubic feet equivalent -- 27% undeveloped oil and 75% gas. The price was $200 million and was funded by bank debt. Also, Morgan Stanley paid $300 million to Shell for an overriding royalty interest in lower risk reserves of 68.4 billion cubic feet equivalent, and Apache will book a $58 million liability. S&P likes the deal, which should complement Apache's 1999 Gulf of Mexico purchase from Shell. S&P thinks the price is fair for these Gulf reserves at $1.57 per million cubic feet equivalent.

Adaptec: (ADPT): Maintains 3 STARS (hold)

Analyst: Megan Graham Hackett

Adaptec warned of a June-quarter shortfall on July 2. It sees revenues of $107 million, below S&P's $117 million estimate, as June business fell short of expectations. The company cited economic uncertainty as the cause for the sales shortfall. S&P believes that Adaptec has continued to struggle amid the weak technology spending environment and as its iSCSI technology has not ramped as quickly as initially hoped. S&P is cutting the fiscal 2004 (March) earnings per share estimate by 4 cents, to 16 cents. With Adaptec trading near cash and marketable securities of $6.80 a share, S&P views the shares as worth holding.


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