Markets & Finance

S&P Says Hold PeopleSoft


PeopleSoft (PSFT): Maintains 3 STARS (hold)

Analyst: Jonathan Rudy

At an analysts' meeting Thursday, the enterprise applications software company provided an update on the recent J.D. Edwards acquisition, and PeopleSoft's utlook through 2004. While S&P thinks the acquisition should provide cross-selling opportunities, S&P remains skeptical about the potential cost savings. PeopleSoft also announced a $350 million stock buyback. S&P sees 55 cents earnings per share in 2003 and 86 cents in 2004, benefitting in 2004 from the purchase of J.D. Edwards. With what S&P views as significant integration risk, S&P would not add to positions, even though at 23 times S&P's 2004 earnings per share estimate, PeopleSoft is trading at a discount to peers.

Eli Lilly (LLY): Maintains 3 STARS (hold)

Analyst: Herman Saftlas

At an analysts' meeting Friday, Lilly sees 2003 earnings per share of $2.55-$2.60, at the high end of prior guidance. But it gave no guidance for 2004 as uncertainties surround two new drug launches. The planned launch of Duloxetine for stress urinary incontinence has been delayed to complete new drug interaction studies. This may also delay the launch of Cymbalta antidepressant (same molecule as Duloxetine), a potentially much more important drug, in S&P's view. S&P would hold Lilly, given the view of its broad-based pipeline and with its shares at 21 times S&P's 2004 estimate of $2.93, a modest premium to peers.

Janus Capital Group (JNS), Alliance Capital Management (AC), Franklin Resources (BEN), and T. Rowe Price Group (TROW): Maintains 3 STARS (hold); Easton Vance (EV) and Legg Mason (LM): Maintains 4 STARS (accumulate)

Analyst: Analyst: Robert McMillan

S&P is neutral on the asset manager industry and believes that these companies will generally perform in line over the next 12 months with the broader market, to which their businesses are closely tied. In the shorter term, however, S&P expects that evolving news about alleged illegal trading schemes at Janus and other mutual fund businesses, which may eventually lead to penalties, may contribute to heightened volatility.

Intel (INTC): Reiterates 5 STARS (buy)

Analyst: Thomas Smith

Intel increased its revenue and gross margin guidance for the September quarter, after an increase on Aug. 22, but also plans a higher tax rate. Net, S&P is raising the third-quarter earnings per share estimate by 1 cent, to 22 cents. Given chip demand running ahead of the typical seasonal lift and an improving outlook for gross margin, S&P is raising the 2003 earnings per share estimate to 75 cents, from 73 cents, and is raising 2004's estimate to $1.00, from 95 cents. S&P's 12-month target price remains $38 a share, based in part on a price-to-book analysis (the tangible book value of $4.79 times the historical annual average high price-to-book multiple of 8).

Advanced Micro Devices (AMD): Upgrades to 3 STARS (hold) from 1 STAR (sell)

Analyst: Thomas Smith

Advanced Micro said on Wednesday that third-quarter business was showing signs of improvement. With other chipmakers concurring that the pace of chip orders is picking up, S&P is taking a more positive view of Advanced Micro's prospects despite the expectation of quarterly losses until the third quarter of 2004. S&P sees the Opteron product launch as a plus, but sees intense competition from Intel and debt at nearly 70% of equity as negatives. S&P's 12-month target price of $12 reflects a ratio of a price-to-tangible-book value of 1.8, which is the average annual midpoint of Advanced Micro's historical range over the past decade.

Verizon Communications (VZ): Maintains 3 STARS (hold)

Analyst: Todd Rosenbluth

Following Verizon's conference call Friday morning, S&P continues to see its tentative labor pact removing a cloud. S&P still sees 2003 operating estimate of $2.72, based on the view that margin expansion will be difficult amid weak demand for services. However, S&P is lowering the 2003 S&P Core earnings per share projection to $1.98 on an estimate of a 16-cent fourth-quarter charge for severance and pension benefits based on the contract's retirement incentives. Despite a lower operating p-e and S&P's confidence in Verizon's stronger wireless offering than peers, poor earnings quality would keep S&P from adding to positions.

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

Analyst: Phillip Seligman

In S&P's view, Cigna has removed a major obstacle to its attempted turnaround as it reached a settlement with 700,000 physicians. It will institute new claims payment practices, pay physicians compensation from a $30 million fund, and pay up to $55 million in legal fees. This may slow possible progress on Cigna's efforts to reduce medical cost trends, but S&P thinks better relations with doctors might help Cigna stem a loss of members from doctors refusing Cigna insurance. Assuming a current, below-peer p-e of 10 remains stable, S&P arrives at a $53 price target, based on S&P's 2004 earnings per share estimate of $5.30.


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