Markets & Finance

S&P Downgrades Yum Brands to Hold


Yum Brands : Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Dennis Milton

Yum, an operator of quick-service restaurants such as KFC, Pizza Hut and Taco Bell, has seen its shares rebound more than 50% from a low reached in February. Yum shares now have a

price-earnings of 17, which is based on S&P's 2003 earnings per share estimate of $2.02 -- in line with peers. S&P believes this valuation is appropriate. S&P's discounted cash flow model, which assumes revenue growth of about 6% annually over the next several years, mostly from international expansion and modest increases in same-store sales, indicates that the shares are trading in line with their intrinsic value. S&P's 12-month target price of $37 is based on a forward p-e of 17 and S&P's 2004 earnings per share estimate of $2.18.

Prudential Financial (PRU): Maintains 3 STARS (hold)

Analyst: Susan Dawkins

Insurance giant Prudential agreed to acquire the retirement business of Cigna (CI) for $2.1 billion cash. The planned transaction would add $52 billion to Prudential's assets under management, boost retirement assets to $120 billion, and S&P sees opportunities for operating efficiencies among complementary businesses. Prudential expects the completion of the purchase by March 31, 2004, subject to regulatory and other necessary approvals. S&P views the news as encouraging, but sees a degree of execution risk and is cautious about the potential impact on Prudential with regard to market-timing probes.

Home Depot (HD): Reiterates 3 STARS (hold)

Analyst: Yogeesh Wagle

Home Depot posted October-quarter earnings per share of 50 cents, vs. 40 cents -- beating S&P's estimate by 4 cents. Sales grew 15%, backed by a 7.8% same-store sales gain. S&P thinks the home-improvement retailer's October-quarter results are further proof of significant improvement of customer service, merchandise assortments, and supply chain operations. S&P is raising the fiscal 2004 (Jan.) earnings per share outlook to $1.84, from $1.77, and is upping the fiscal 2005 estimate to $2.02, from $2.00. Also, S&P hiked its target price to $40, from $36, which gives shares a p-e of 19.8, based on the fiscal 2005 earnings per share estimate. This is a small premium to the S&P 500, which S&Ps thinks Home Depot shares merit due to its strong balance sheet and earnings per share quality.

Career Education (CECO): Reinstates with 5 STARS (buy)

Analyst: Massimo Santicchia

Career Education said a lawsuit filed Monday by an former director of Gibbs College, a unit of Career Education, is without merit. The company says it intends a vigorous defense. While it's too early to comment on the merits of the suit and its potential outcome, S&P has no reason to think that the alleged wrongdoing is systemic. S&P estimates that Gibbs' Montclair, N.J. campus has 3% of Career Education's student population and the nine Gibbs schools represent about $150 million of S&P's 2003 revenue projections of $1.1 billion. Even with a higher risk premium in S&P's valuation models, S&P would purchase the shares. S&P's 12-month target price is $60. On Monday, S&P suspended its buy rating amid the news of the lawsuit.

Advanced Micro Devices (AMD): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Thomas Smith

After a higher forecast for semiconductor sales in 2004 from the major trade association and the announcement yesterday that Sun Microsystems (SUNW) would use chipmaker AMD's new Opteron processor in its servers, S&P is raising the 12-month target price to $22, from $15. The shares trade near two times the trailing 12-month sales. Applying that multiple to S&P's 12-month forward sales estimate of $12.10 suggests a potential price appreciation to $24 a share. S&P's price to tangible book value analysis indicates less potential. Blending the measures creates the $22 figure.

Agilent Technologies (A): Reiterates 3 STARS (hold)

Analyst: Megan Graham Hackett

The company's October-quarter proforma earnings per share of 15 cents, vs. a loss of 1 cent, beat S&P's estimate of 1 cents earnings per share on wider gross margin, lower operating expenses, and 2 cents from other income. Revenue fell 4%, which was 5% above S&P's model as automated test equipment revenue grew 18%, semiconductors revenue fell 2%, and test & measurement revenue fell 16%. Orders rose 16% as semiconductor orders surprised S&P with a 36% gain. Agilent sees January-quarter revenue of $1.55 billion to $1.65 billion and earnings per share of 5 cents to 15 cents, in line with S&P's model. Even so, S&P is upping the fiscal 2004 (Oct.) earnings per share estimate by 30 cents, to 56 cents, on lower expense. At a price-sales ratio of two -- in line with peers -- S&P says hold.

MedImmune (MEDI): Reiterates 4 STARS (accumulate)

Analyst: Frank DiLorenzo

MedImmune announced disappointing FluMist sales and cuts its 2003 earnings per share guidance range to 72 cents to 80 cents, from the prior range of 88 cents to 93 cents. S&P is lowering the estimate of peak FluMist sales to $250 million to $300 million by 2009 from $500 million, which S&P calculates at 10 million doses for $25 to $30 each. S&P thinks the current wholesale price of $46 must come down to penetrate the market. S&P is also lowering the 03 earnings per share estimate to 77 cents, from 93 cents, and trimming 2004's to $1.03 from $1.25. Based on S&P's net present-value analysis and revised

discounted cash flow analysis, S&P are cutting the12-month target price to $30, from $40.


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