Steak n Shake : Upgrades to 4 STARS (accumulate) from 3 STARS (hold)
Analyst: Dennis Milton
S&P believes Steak n Shake's renewed emphasis on operations will improve customer satisfaction, marketing effectiveness, and employee retention. S&P has revised the long-term earnings estimates to reflect an expectation of sustained same-store sales growth and improved operating margins. Shares currently trade at 15 times S&P's fiscal 2004 earnings per share estimate of $1.01 (revised upward by 6 cents), a discount to peer levels. S&P's 12-month target price of $18 is based on a forward p-e ratio of 17.5, in line with peers, and S&P's fiscal 2004 earnings per share estimate. At about 19% below this level, shares are attractive.
GlaxoSmithKline (GSK): Maintains 3 STARS (hold)
Analyst: Herman Saftlas
Glaxo's Paxil antidepressant received FDA clearance for the treatment of a severe form of PMS. This follows recent approvals for the once-daily antidepressant Wellbutrin XL, and Levitra for erectile dysfunction. Despite the new products, S&P still sees sluggish earnings growth next year, largely due to anticipated generic rivals to older versions of Paxil, Wellbutrin, and Flonase in 2004. However, Wellbutrin XL still recommends holding these shares, which are valued at 14 times S&P's 2004 estimate, representing a steep discount to peer European drug stocks. Glaxo also offers what S&P views as an attractive 3.2% dividend yield.
Limited Stores (LTD): Maintains 3 STARS (hold)
Analyst: Michael Driscoll
S&P looks for Limited to report flat same-store sales for August this Thursday and expects continued weakness in apparel. Victoria's Secret is driving traffic with product launches and marketing campaigns. S&P believes Pink, a new sub-brand targeted at a younger demographic and in about 50 stores, is promising. Bath & Body Works is launching products that reposition brand with healing and wellness attributes. S&P is adjusting the fiscal 2004 earnings per share estimate to $1.08 to exclude the 9 cents gain on Limited's sale of half its interest in Allied Data Systems.
InterActiveCorp (IACI): Maintains 5 STARS (buy), and Sabre (TSG): Maintains 3 STARS (hold)
Analyst: Scott Kessler
InterActive announced that it terminated the agreement whereby its Hotels.com subsidiary provided hotel inventory to Sabre's Travelocity unit. On Friday, Sabre filed an 8-K indicating Travelocity ended its exclusive relationship with Hotels.com, to expand distribution of its own merchant inventory. S&P thinks this development will not materially impact InterActive or Sabre, but sees it as the continuation of increasing competition in the online travel area. Sabre trades on par with the S&P 500 on p-e-to-growth basis; InterActive trades at a notable discount to S&P's discounted cash flow analysis-derived target price of $48.
Triad Hospitals (TRI): Reiterates 4 STARS (accumulate)
Analyst: Frank Connelly
Triad agreed to buy four Arkansas hospitals from Tenet Healthcare for $142 million. The four hospitals generate about $250 million in annual revenue on their 633 beds, compared with S&P's 2003 revenue forecast of $3.9 billion from Triad's 9,400 existing beds. Triad reiterated its prior earnings guidance. However, given Triad's significant presence in Arkansas, S&P believes this purchase could widen margins and add to 2004 earnings. For now, S&P still sees 2003 earnings per share at $2.20, and looks for $2.56 earnings per share for 2004. At a p-e-to-growth of 0.85 times S&P's 2004 earnings per share estimate, Triad shares are trading at a 15% discount to their peers.
Republic Services (RSG): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)
Analyst: Stewart Scharf
Republic Services lowered its 2003 earnings per share guidance range by 5 cents, to $1.41 to $1.43, due to 3 cents higher insurance costs, plus fuel and disposal costs. Following an actuarial review, Republic will record a $24 million pretax insurance reserve in the third quarter. Republic still sees free cash flow in excess of $240 million for 2003, as it focuses on internal growth, buyback, and dividends. S&P is cutting its 2003 earnings per share estimate by 8 cents, to $1.42 (before a 9 cents reserve) and is trimming 2004's earnings per share estimtae by 5 cents, to $1.60. At 16 times S&P's 2003 estimate, in line with peers, S&P now sees the stock as fairly valued and has lowered the 12-month target price by $2, to $26.