Markets & Finance

S&P Downgrades Furniture Brands to Hold


Furniture Brands (FBN): Downgraded to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Amrit Tewary

Following the recent restructuring of the company's manufacturing operations, S&P believes Furniture Brands is well-positioned to benefit from a projected pickup in orders and shipments in 2004. However, S&P no longer expects the shares to outperform the market over the next 12 months. The shares are approaching S&P's 12-month target price of $27, based on a historical average p-e of 14 times S&P's 2004 earnings per share estimate of $1.96. S&P would hold Furniture Brands, given its dividend yield of roughly 2% and S&P's expectation of a gradual recovery in furniture demand.

H.J. Heinz (HNZ): Maintains 3 STARS (hold)

Analyst: Richard Joy

Heinz reported October-quarter earnings per share from continuing operations and before special items of 54 cents, vs. 50 cents, as expected. October-quarter sales, excluding divestitures, rose 7.7% on a 1.6% volume gain and a 6% currency benefit. S&P is keeping the fiscal 2004 (Apr.) earnings per share estimate at $2.20, an 8.4% gain. At 15 times S&P's calendar 2004 earnings per share estimate of $2.35, S&P thinks the condiment-maker's shares are worth holding, given its strong free-cash flows, improving returns, and an attractive 3% dividend. S&P is raising the 12-month target price by $3, to $38, which assumes Heinz shares will trade in line with peers.

Credence Systems (CMOS): Maintains 4 STARS (accumulate)

Analyst: Richard Tortoriello

The chip-equipment maker posted an October-quarter GAAP loss of 35 cents, vs. an $1.84 loss -- a penny wider than S&P's loss estimate, on a 34% sales rise. Orders rose 20% from the July quarter. The company added nine new customers in the October quarter, and 49 cents for fiscal 2003 (Oct.). S&P sees current costs offset by high operating leverage as volume increases. S&P is narrowing the fiscal 2004 estimate by a penny, to a loss of 30 cents, and sees fiscal 2005 earnings per share of 75 cents. S&P thinks Credence is well-positioned in the expanding market for low-cost testing equipment. The shares are attractive at 2.2 times the book value, well below the 10-year average of 3.7 times. S&P's 12-month target price is $21.

Citigroup (C): Maintains 5 STARS (buy)

Analyst: Mark Morgan

Citigroup agreed to acquire the consumer finance unit of Washington Mutual (WM) for $1.25 billion. The planned transaction would add 409 offices in 25 states and $4 billion in assets. S&P believes the deal, expected to close in the first quarter of 2004, subject to regulatory approvals, is consistent with Citigroup's incremental acquisition strategy to build its U.S. consumer business. It expects the deal to be accretive to 2004 earnings. S&P still sees 2004 earnings per share at $3.80, since the deal is relatively small for Citigroup's size. S&P's target price remains $57, based on shares trading at 15 times that estimate, in line with its historical average.

Barr Laboratories (BRL): Reiterates 5 STARS (buy); Aventis (AVE), Eli Lilly (LLY) , Novartis (NVS), and Pfizer (PFE): Reiterates 4 STARS (accumulate)

Analyst: Herman Saftlas

S&P expects the just-passed Medicare prescription coverage to have a positive near-term impact on the drug industry, with higher volume more than offsetting more widespread price discounting. Companies catering to the elderly with drugs for heart conditions, arthritis, and diabetes should benefit the most. However, with the government eventually controlling 50% of all prescriptions, S&P is less sanguine about the longer-range effects.

Novellus Systems (NVLS): Maintains 4 STARS (accumulate)

Analyst: Richard Tortoriello

In a mid-quarter update, chip-equipment maker Novellus raised the fourth-quarter order guidance to $275 million, from a range of $230 million to $245 million. The company sees sales of $220 million and earnings per share of 6 cents, both at the high end of previous guidance. Novellus said foundries are increasing orders as their capacity tightens. S&P believe foundries in Asia will be a major driver of the upcycle. S&P is raising the 2003 earnings per share estimate by a penny, to 23 cents, based on Novellus' new guidance, but is keeping the 2004 earnings per share estimate of 82 cents. S&P is also raising the target price to $50, from $46. With signs of a strong upturn in both chips and equipment in 2004, S&P thinks the shares are attractive.

Priceline.com (PCLN): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Following last week's PhoCusWright Executive Conference, which focused on Internet travel, S&P thinks Priceline is one of the most confounding stocks in S&P's Internet Software & Services and Internet Retail universe. Although S&P thinks Priceline has an established franchise in "opaque," or extremely discounted travel, and is a profitable company with a healthy balance sheet, S&P is concerned about increasing competition from Hotwire.com and an uphill battle in the retail segment. Based upon revised peer analysis, S&P is reducing the 12-month target price by $3, to $24, due to the volatility of the shares.


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