Markets & Finance

S&P Downgrades Sovereign Bancorp to Accumulate


Sovereign Bancrorp (SOV): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Erik Eisenstein

Sovereign is up after a published report says it rejected a buyout bid by the Royal Bank of Scotland worth $25 per share, instead "holding out" for a better deal. Neither company has commented today. Royal previously expressed interest in Sovereign, which said it was willing to consider offers. S&P is raising the 12-month target price, already at a p-e-to-growth premium to peers, by $3, to $26, reflecting S&P's view of Sovereign as an attractive acquisition target as well as its higher peer market valuations after last week's Bank of America/FleetBoston deal. But after the stock runup, S&P is tempering its opinion.

General Motors (GM): Maintains 3 STARS (hold)

Analyst: Efraim Levy

GM's October vehicle sales fell 7% from a year ago. Light truck sales were down 8%, while cars declined 6%. Sales at Ford dropped 2%, but Chrysler Group's sales rose 11%. S&P believes GM lost market share during the month. The company modestly increased its North American production forecast for the fourth quarter, despite what S&P views as a high inventory level. S&P projects industry light vehicles sales of 16.5 million and 17.1 million units in 2003 and 2004, respectively. Based on a p-e multiple that's in line with peers, S&P has a 12-month target price of $47.

AT&T Wireless (AWE): Maintains 4 STARS (accumulate)

Analyst: Kenneth Leon

AT&T Wireless launched a new plan, "Best Deal Promise," which allows new customers who sign up after November 24 the option to change calling plans without penalty within 90 days of activation, if the company chooses to offer a better plan. After mixed results in the September quarter, AT&T must work harder to maintain market share, in S&P's view. Near term, S&P expects margins to flatten with more price competition. S&P's target price is $9 based on a forward p-e. Given that shares are trading below book value and below peers at 1.2 times S&P's 2004 sales estimate, S&P would accumulate AT&T Wireless.

Excelon (EXC): Maintains 4 STARS (accumulate)

Analyst: Justin McCann

S&P views favorably Excelon's pact to buy Illinois Power from Dynegy. The deal value of $2.225 billion includes the assumption of $1.8 billion in debt and a payment of $275 million cash. With 590,000 electric customers and 415,000 natural gas customers in central and southern Illinois, the mid-size acquisition complements Excelon's 3.6 million ComEd customers in Chicago and northern Illinois. S&P would expect the deal to be completed by the end of 2004, subject to approvals. Expecting a peer p-e on S&P's 2004 earnings per share estimate of $5.40, S&P still has a 12-month target price of $70. With a 3.1% dividend yield, S&P views Excelon as attractive.

Fortune Brands (FO): Reiterates 5 STARS (buy)

Analyst: Howard Choe

Fortune agreed to buy Therma-Tru, a domestic maker of residential entry doors with more than $400 million in annual sales, at a price of $925 million in cash. The acquisition, pending approvals, likely extends Fortune's trend of accretive purchases of leading brands. Therma-Tru is the market leader in residential doors with a 25% marketshare. Fortune expects 15 cents accretion to earnings per share in the first year and more in subsequent years. The acquisition will be funded with short-term and long-term debt. Given the strong outlook for housing and remodeling, and the expected earnings accretion, S&P views this transaction favorably.

FootStar (FTS): Maintains 4 STARS (accumulate)

Analyst: Yogeesh Wagle

FootStar shares are down after the company delayed the release of restated financials. It expects the restatement to reduce earnings for the period of 1997 to June 2002 by $31 million to $38 million, up from the earlier estimate of $29 million to $31 million. S&P is increasing the 2003 operating loss estimate to 64 cents per share, from 54 cents. While competition in the footwear business is still highly promotional, S&P expects firmer footwear pricing in 2004 and believes this will drive a turnaround, along with operational improvements and FootStar's growing business with Wal-Mart. At 8.4 times S&P's 2004 earnings per share estimate of 64 cents, below peers, S&P finds the shares attractive.

First Health (FHCC): Maintains 3 STARS (hold)

Analyst: Phillip Seligman

First Health posted third-quarter earnings per share of 42 cents, vs. 32 cents -- 3 cents above S&P's estimate. First Health's 2004 earnings per share guidance at $1.50 to $1.55 is disappointing, S&P thinks. Competition has been greater than S&P expected, with First Health losing corporate accounts and gaining few new ones, while other accounts shifted to lower-margin services. Higher member contributions are causing dropouts by federal employee members. S&P is lowering the 2004 earnings per share estimate to $1.55, from $1.80, and is cutting the target price by $7, to $20, which is 13 times S&P's 2004 estimate. This is below forward p-e's of peers and the S&P 400 MidCap.


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