Markets & Finance

S&P Downgrades Wendy's to Hold


Wendy's (WEN ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate); Outback Steakhouse (OSI): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Dennis Milton

Many restaurant stocks have surged over the last several weeks amid what S&P views as an improving economy and strong same-store sales trends. S&P is downgrading these restaurants on valuation. S&P is raising the Wendy's 12-month target price by $1, to $46, and is raising Outback's target price by $1, to $44, both amid stronger sales trends. Still, valuations have reached levels that S&P believes merit reduced recommendations.

E Trade (ET): Maintains 3 STARS (hold)

Analyst: Robert Hansen

At a conference Wednesday, E Trade reiterated its prior fourth-quarter earnings per share guidance of 16 cents to 18 cents. It stressed its commitment to credit quality in its lending business, which helped it to maintain customer relationships during a stock-market downturn. S&P believes E Trade may increase its share buyback or reduce debt with its rising free cash flow. S&P is leaving the 2003 earnings per share estimate at 57 cents, and is keeping the 2004 estimate at 73 cents. Also, S&P's 12-month target price is still $13, or 18 times the 2004 earnings per share estimate. Despite growth in its brokerage segment, S&P would not add to positions, given an expected decline in E Trade's banking business.

Host Marriott (HMT): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Raymond Mathis

Host Marriott resolved its World Trade Center insurance matters, resulting in a one-time gain of about $210 million, or 70 cents a share. S&P had been concerned that the company would have been required to suspend preferred dividends in the fourth quarter, subordinating common shareholder interests. S&P's worries that Host Marriott might use its cash flow for acquisitions were deepened with the Hyatt Maui purchase and the sale of 23.5 million common shares. But the settlements have alleviated many of S&P's concerns regarding Host Marriott's health. S&P is raising the target price to $12, from $10, based on a net asset value analysis.

Merck (MRK): Reiterates 3 STARS (hold)

Analyst: Herman Saftlas

Merck projected 2004 earnings per share of $3.11 to $3.17. S&P continues to estimate $3.15 for 2004, but is lowering the 2003 estimate by a penny, to $2.91, to reflect the impact of a new inventory-management program. S&P sees 7% top-line growth in 2004, with low-to-mid teens growth in Fosamax and Singulair offsetting flat showings in the Zocor and Coxib lines. S&P expects a low-teens percentage rise in R&D expenses, but says selling, general, and administrative costs should be maintained at the 2003 level. S&P's 12-month target price remains $47, which is derived from forward

price-earnings and

discounted cash-flow analyses. Merck's dividend is yielding 3.4%.

Chico's FAS (CHS): Maintains 3 STARS (hold)

Analyst: Marie Driscoll

The women's retailer beat S&P's November-quarter earnings per share estimate by a penny, reporting 30 cents, vs. 18 cents. Strong store productivity, shown by a 20.9% sales rise at comparison stores, drove an 140-basis-point gross margin expansion. This helped to leverage selling, general, and administrative costs by 70 basis points and resulted in a 12.7% net margin -- up 140 basis points. S&P is lifting the fiscal 2004 (Jan.) earnings per share estimate by a penny, to $1.11, and is maintaining the fiscal 2005 estimate of $1.36. S&P's 12-month target price remains $38, or 28 times the fiscal 2005 estimate. This is a 40% premium to peers and a 60% premium to the S&P 500. S&P regards Chico's as fairly valued and expects market performance over the next 12 months.

Boeing (BA): Reiterates 5 STARS (buy)

Analyst: Robert Friedman

Even in a worst-case scenario, in which the Pentagon's temporary halt to the $27 billion 767 tanker program leads to a final contract cancellation and a shut down of the 767 line, S&P stills believes Boeing shares are materially undervalued. In S&P's view, the mediocre economics of both the commercial and military aerospace businesses are already in S&P's discounted cash-flow model. Working off of a low $2.6 billion free-cash base, S&P forecasts a 6% long-term, free cash flow growth rate and a 12% average

return on equity. As a result, S&P's DCF-based 12-month target price still values Boeing shares at $50.


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