Markets & Finance

S&P Lowers Cigna to Avoid


Cigna (CI): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Phillip Seligman

The health-insurance giant warned that the second-quarter and full-year 2003 earnings per share would likely be $1.00-$1.15 and $5.00-$5.25, respectively, down from the prior guidance of $1.40-$1.60 and $6.25-$6.50, respectively. Despite its turnaround initiatives, S&P previously noted its wariness on Cigna's growth assumptions, given above-peer medical cost trends and intensifying competition -- negatives that S&P thinks have seemed to worsen for Cigna. The company also plans to take another charge to strengthen its run-off reinsurance operations reserves. At 8.5 times S&P's 2003 estimate of $5.00, Cigna trades below peers. But S&P would avoid the shares, based on a lack of earnings per share visibility through 2004.

Gilead Sciences (GILD): Maintains 4 STARS (accumulate)

Analyst: Frank DiLorenzo

Gilead announced it will exceed analyst estimates for the second quarter. Full results will be announced July 31. The company sees first-quarter Viread sales of around $165 million, vs. a year-ago's $45 million -- well above S&P's $122 million projection. Part of the increase reflects a wholesaler stocking ahead of recent price increase. However, S&P thinks primary gains are from strong end-user demand. S&P is raising its second-quarter earnings per share estimate to 43 cents, from 28 cents, and is raising the full-year estimate to $1.30, from 96 cents, with the potential for upside. On a revised net present-value analysis, S&P sees the shares worth $70-$75.

Yahoo (YHOO) and Overture Services (OVER): Maintains 3 STARS (hold)

Analyst: Scott Kessler

Overture agreed to be acquired by Yahoo! in a cash and stock transaction valued at about $1.63 billion -- a 13% premium above Friday's close. The deal is subject to shareholder and regulatory approval. S&P thinks the planned deal makes sense for both. Yahoo would acquire a leader in the sponsored-search market, and bolster its algorithmic search capabilities to better compete with Google. S&P thinks Overture would secure its future with one of its primary partners at what S&P believes is a reasonable premium. While Yahoo expects the deal to be earnings per share neutral over the next year, S&P likes the deal from a strategic standpoint.

Boeing (BA): Reiterates 5 STARS (buy)

Analyst: Robert Friedman

Although The Wall Street Journal reported that Continental Airlines will defer orders for 36 Boeing 737 jets and 11 Boeing 757 jets to 2008 and beyond, S&P thinks the order deferrals will not affect Boeing's 2003 or 2004 earnings per share, and expects Continental will still take deliveries in 2003 and 2004. Moreover, Continental's 737 order deferrals account for only a small part of Boeing's 800-plane order backlog for this popular model. In any event, S&P has already baked in a modest, 4%-6% long-term free cash compound annual growth rate assumption in its free cash flow models, which calculate that Boeing is worth about $40 a share.

Citigroup (C): Maintains 5 STARS (buy)

Analyst: Stephen Biggar

Citigroup posted second-quarter earnings per share of 83 cents vs. 73 cents -- a penny ahead of S&P's estimate. Retail banking was again a main revenue driver, aided by mortgage refinancing volume and the integration of Golden State Bancorp. The corporate and investment banking segment was relatively flat. S&P expects continued strong retail banking results and a focus on credit risk, expense management, and market share expansion, plus a more stable environment for capital markets businesses, to drive double-digit earnings per share growth in 2004. S&P also views the 75% increase in Citigroup's dividend as a favorable development.

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

Analyst: Megan Graham Hackett

Based on Juniper Networks' conference call last week, S&P believes demand for networking gear continues to be stable, and that there's select opportunities for wins in the carrier market. In such an environment, S&P is increasingly confident in its thesis that Cisco should outperform peers, given its broad product portfolio, competitive positioning, and market-share gains. In addition, because of the low interest-rate environment, S&P has revisited its discounted cash flow model, and S&P's new analysis yields a price target of $21 for Cisco shares, up from the prior $18.50.


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