Markets & Finance

S&P Says Hold General Electric on Valuation


General Electric (GE): Maintains 3 STARS (hold)

Analyst: Robert Friedman

GE posted a 2.4% slip in third-quarter (GAAP) earnings per share, to 40 cents, excluding accounting charges. However, S&P calculates a 3% rise in preliminary S&P Core earnings per share, to 34 cents, after negotiating through, in S&P's view, a confusing and insufficient amount of financial disclosures. As expected, the company's power turbine and plastics units were the cause its sluggish third-quarter earnings per share results. S&P believes that GE's size and, its increasingly aggressive transformational strategy, reduces the likelihood of a long-term free-cash flow growth rate of 10%+.

Bausch & Lomb (BOL): Upgrades to 3 STARS (hold) from 1 STAR (sell)

Analyst: Robert Gold

Bausche & Lomb's Zyoptix, an advanced laser eye surgery system, gained FDA approval Friday. S&P thinks Bausch & Lomb will be able to transition its domestic customers towards the new system, and sees the company gaining market share from rivals Visx and and Alcon. Although Bausch & Lomb remains far behind its rivals in terms of an installed laser base, S&P believes the new Zyoptix revenue opportunity, combined with its stock's low valuation vs. the device group, will help generate investor interest in the shares.

Synopsys (SNPS): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Richard Tortoriello

Comparisons of Synopsys sales growth with the semiconductor industry show that the company's sales tend to grow in downturns and peak midway through the chip cycle. S&P thinks this reflects chipmakers' tendency to "design their way out" of downturns, then cut design automation spending once new products have been released. Though current chip up-cycle is in beginning stages, S&P is concerned that recent weakness in electronic design automation stocks may be anticipating the phenomenon. S&P's target price for Synopsys is $30, a market multiple of 16.5 times S&P's fiscal 2004 (Oct.) estimate of $1.83.

Abercrombie & Fitch (ANF), InterActiveCorp (IACI), Regis (RGS), and Wendy's (WEN): Maintains 5 STARS (strong buy): Thomas Graves

S&P sees the latest retail sales and jobless claims numbers supporting the view that the near-term and 2004 outlook for consumer spending is good. Also, S&P expects improved inventory management by retailers to help profits. S&P looks for a solid holiday shopping season, followed by good growth in personal income, modest inflation, and relatively benign (albeit rising) interest rates in 2004. Within the sector, S&P's favorites include specialty retailer Abercrombie & Fitch, media and e-commerce company InterActiveCorp, hair-salong chain Regis, and lodging company LaQuinta.

Janus Capital (JNS): Maintains 3 STARS (hold)

Analyst: Robert McMillan

Janus, one of several fund companies being investigated by the New York State Attorney General for alleged improper trading, says assets under management in September fell 3.6% from August, to $146.5 billion, driven in significant part by mutual fund outflows, but rebounded to $152.1 billion through October 7. As the investigation unfolds, S&P would expect the shares to be somewhat volatile, but doesn't expect a material effect on operations. S&P is maintaining the earnings per share estimates of 89 cents for 2003, and $1.16 for 2004, and is keeping the 12-month target price of $18.

Juniper Networks (JNPR): Maintains 3 STARS (hold)

Analyst: Megan Graham Hackett

The maker of networking gear posted third-quarter earnings per share of 4 cents, vs. a loss of 2 cents, above S&P's 3 cents earnings per share estimate, on wider gross margin, expense controls, and a lower interest expense. Revenue rose 13% on strength in higher-end/core units and in the Americas and Asia regions. Book-to-bill was above 1, but deferred revenue was down from the second quarter. Juniper sees fourth-quarter sales of $180 million, and earnings per share of 5 cents. S&P is raising its 2003 earnings per share estimate by 3 cents, to 14 cents, but says 2 cents comes from a lower interest expense. But at 11 times price/sales -- well above peers-- S&P believes Juniper's improving business momentum is reflected in its share price.


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