Markets & Finance

S&P Says Sell Starbucks


Starbucks (SBUX): Reiterates 1 STAR (sell)

Analyst: Dennis Milton

The coffee chain posted 11% higher November same-store sales, year-to-year, better than S&P's expectation. Revenues were 29% higher than a year ago. The shares now trade at 39 times S&P's fiscal 2004 (Sep.) earnings per share estimate of 83 cents, well above the market multiple. Despite strong sales trends, S&P doesn't think this valuation is justified, given the company's slowing long-term growth rate. According to S&P's

discounted cash-flow model, which assumes 22% revenue growth in fiscal 2004 that gradually declines thereafter, shares are trading at a 25% premium to their intrinsic value.

Dollar Tree Stores (DLTR): Maintains 3 STARS (hold)

Analyst: Jason Asaeda

Discount retailer Dollar Tree posted October-quarter earnings per share of 31 cents, vs. 27 cents, a penny above S&P's estimate. A better-than-expected 9.1% operating margin was driven by reduced shrinkage and markdowns, improved labor productivity, and cost controls. In S&P's view, supply-chain systems are likely to drive further margin expansion in fiscal 2005 (Jan.). However, the company's sales guidance of $880 million to $905 million in the January quarter and $3.2 billion to $3.3 billion in fiscal 2005 is somewhat disappointing. S&P is lowering the fiscal 2004 earnings per share estimate to $1.52, from $1.54, and is trimming the fiscal 2005 estimate to $1.74, from $1.81. Also, S&P is reducing the 12-month target price to $36, from $38, on revised estimates.

J.P. Morgan (JPM): Reiterates 2 STARS (avoid)

Analyst: Mark Morgan

The investment bank announced an agreement to acquire Citigroup's Electronic Financial Services unit for $380 million. The closing is expected by the end of 2003. The unit provides benefits payments and prepaid stored-value cards to state and federal government agencies and should add to J.P. Morgan's service capabilities to the public sector. S&P is maintaining the earnings per share estimates. Also, S&P's 12-month target price remains $31, with a

price-earnings of 10, based on S&P's 2004 earnings per share estimate of $3.05. S&P thinks the discount to its peer-group average p-e is appropriate, given the company's lower earnings per share quality.

H&R Block (HRB): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Michael Jaffe

October-quarter earnings per share of 6 cents, vs. a 4 cents loss before charges is 12 cents above S&P's estimate. The results were aided by a strong mortgage business and cost cuts in the U.S. tax business. S&P is raising the fiscal 2004 (Apr.) earnings per share estimate by 25 cents, to $3.50, vs. H&R Block's increased $3.65 to $3.85 view. S&P also is upping the fiscal 2005 estimate by 30 cents, to $3.65. At 14 times S&P's new fiscal 2005 estimate, the shares trade below the S&P 500. S&P sees the mortgage segment remaining strong amid low mortgage rates, but thinks the mature tax business and litigation concerns will leave the p-e below the S&P 500's p-e. On a higher forecast, S&P is raising the target price by $18, to $53, giving the shares a p-e of 15, based on the fiscal 2005 estimate.

Citigroup (C): Maintains 5 STARS (buy)

Analyst: Mark Morgan

Citigroup announced it has discovered a revenue guarantee agreement with a subcontractor for its transfer agent business in the 1997 through 1999 period that should have been disclosed to the boards of Citigroup's proprietary funds. Citigroup is making a $16 million payment to the funds, setting new procedures, and making personnel changes. The U.S. Attorney is investigating the issue. S&P thinks this development is immaterial to earnings per share in the near term and will monitor further developments. S&P's target price for Citigroup shares is $57, with a p-e of 15, based on S&P's 2004 estimate of $3.80 -- in line with Citigroup's historical average p-e.

Washington Mutual (WM): Reiterates 5 STARS (buy)

Analyst: Erik Eisenstein, Catherine Seifert

Washington Mutual shares weakened a bit Tuesday after news that the company agreed to sell its subprime financing arm, Washington Mutual Finance, to Citigroup for $1.25 billion in cash. S&P attributes some of the weakness to investor disappointment that the deal was not a full takeover of Washington Mutual. Nevertheless, S&P views the planned sale as positive since it should free up capital to enable the company to expand its core retail banking franchise. With a p-e of 9.6, based on S&P's $4.71 2004 earnings per share estimate, and with a 3.6% dividend yield, S&P views the shares as undervalued vs. peers. S&P's 12-month target price remains $51.

Ethan Allen (ETH): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

S&P believes Ethan Allen is well-positioned for a gradual rebound in demand for high-end residential furniture. S&P thinks its vertically integrated model and single-brand focus at retail should enable the company to continue to generate above-average margins and earnings growth rates in comparison to furniture peers. S&P expects investors to increasingly value Ethan Allen on its fiscal 2005 (June) earnings. S&P is raising the 12-month target price to $43, from $38, and applying a historical average p-e of 16 to S&P's fiscal 2005 (June) estimate of $2.67. S&P would hold Ethan Allen, based primarily on valuation.


Steve Ballmer, Power Forward
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