Markets & Finance

S&P Says Hold Wal-Mart


Wal-Mart (WMT): Maintains 3 STARS (hold)

Analyst: Jason Asaeda

Wal-Mart shares are up modestly as the discount chain projected a 4% to 6% increase in same-store sales for August, up from its prior 3% to 5% guidance. Bestsellers for the month include apparel, food, hardware, pharmaceuticals, toys, and electronics. The company has reported strong back-to-school sales momentum, which S&P believes could carry into September. However, until S&P sees a clearer sales trend for the full quarter, S&P is reiterating the 46 cents October quarter and $2.04 full fiscal 2004 (Jan.) earnings per share estimates. With a 12-month target price of $64, S&P recommends investors continue to hold Wal-Mart shares.

Tenet Healthcare (THC): Reiterates 2 STARS (avoid), and Health Management (HMA): Maintains 3 STARS (hold)

Analyst: Frank Connelly

Health Management Associates agreed to acquire five of the 14 hospitals that Tenet put up for sale in March, for about $550 million. The proceeds are likely to go toward Tenet's debt reduction. Tenet expects these proceeds to represent 70% of cash raised from the eventual sale of all 14 hospitals, or about $785 million total. S&P thinks the sales help put Tenet's turnaround strategy on track and gives management some credibility on its execution. However, S&P thinks Tenet still has a long way to go, with significant operational and legal risks remaining. Shares, which trade at a slight premium to peers, are no longer appear cheap, in S&P's view. For Health Management, S&P likes the strong acquisition track record and thinks the purchases could be accretive to 2004 earnings. The five hospitals generate about $400 million in annual revenue on their 1,061 beds, compared with S&P's 2003 revenue forecast of $2.6 billion from Health Management's existing 6,500 beds. However, Health Management shares trade at a 19% premium to its peer group, based on S&P's current 2004 earnings per share estimate of $1.32. S&P sees Health Management shares as fairly valued.

Rockwell Automation (ROK): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: James Sanders

Rockwell announced that its chief financial officer Michael Bless would be leaving the company. After listening to the conference call, S&P believes that this decision was purely for personal reasons and is not indicative of any underlying problems. S&P continues to believe Rockwell will benefit from an anticipated recovery in business investment spending in the near term. However, S&P's discounted cash flow model, with a long-term free cash flow growth assumption of 4.5% to 5%, gives S&P a 12-month target price of $26. Given S&P's view of limited upside potential, S&P would not add to positions.

Lucent Technologies (LU): Reiterates 2 STARS (avoid)

Analyst: Kenneth Leon, Ari Bensinger

In an 8-K filing, Lucent says that the U.S. Department of Justice and the Securities and Exchange Commission have commenced an investigation into possible violations of the Foreign Corrupt Practices Act in connection with the company's operations in Saudi Arabia. Lucent says it is cooperating with both investigations. Operationally, S&P believes that Lucent is falling behind its competitors in the wireless and professional service sectors. At a ratio of enterprise value to S&P's 2003 sales estimate -- well above peers -- S&P continues to view Lucent as unattractive.

Schering-Plough (SGP): Maintains 1 STAR (sell)

Analyst: Herman Saftlas

Despite a recent selloff after a 68% dividend cut and lower guidance on earnings per share, S&P continues to view Schering shares as unattractive. With ongoing erosion in the Claritin line (hurt by over-the-counter rivals), plus worsening competitive pressures in the hepatitis C franchise, S&P has cut the 2003 earnings per share estimate by 2 cents, to 43 cents, and cut 2004's earnings per share estimate by 16 cents, to 37 cents. Also, S&P view Schering's pipeline as relatively thin, and thinks the terms of the Zetia venture with Merck (which has the first rights to the drug in a Schering merger) is lessening the company's takeover appeal. S&P's 12-month target price is $13, based on a discounted cash flow model.

Freddie Mac (FRE): Maintains 2 STARS (avoid)

Analyst: Erik Eisenstein

Late Friday, Freddie Mac announced that it acceded to a directive from its regulator, the Office of Federal Housing Enterprise Oversight, to replace CEO Greg Parseghian, upon completing a search for his successor. This is consistent with previously published reports. Parseghian's short tenure has not been without some positives, including his commitment to mark to market Freddie Mac's balance sheet regularly. But, on balance, S&P thinks his involvement in the events giving rise to the accounting controversy tends to undermine his credibility in leading remedial action. With ongoing regulatory investigations, S&P maintains its avoid opinion.


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