Markets & Finance

S&P Says Accumulate Martha Stewart Living


Martha Stewart Living (MSO): Maintains 4 STARS (accumulate)

Analyst: William Mack, CFA

Martha Stewart posted a second-quarter loss of 39 cents, vs. earnings per share of 2 cents, 5 cents wider than our loss estimate. We think that the company will have reduced operating costs at each of its three unprofitable segments by yearend. Although we maintain our estimated loss of $1.24 in 2004, we're widening our 3-cent 2005 loss estimate to a 43-cent loss, which assumes that all units remain intact but that the publishing, TV, and direct-to-consumer businesses will shrink. We're raising our 12-month target price to $12 from $11, based on our sum-of-parts analysis, attributing nearly 80% of Martha Stewart's value to its merchandising unit.

AT&T (T): Maintains 3 STARS (hold)

Analyst: Todd Rosenbluth

We think AT&T's plan to raise prices for consumer local services in New York, beginning in Septenber, is in response to likely higher wholesale access rates. We think it should help keep AT&T's consumer operating margin relatively wide. Even with the planned price hike, we believe AT&T's proposed offering is attractive relative to the competition, and should have a minimal effect on churn. Our 2004 operating earnings per share estimate of 74 cents assumes higher interest expenses in late 2004 from debt downgrades. We would hold the shares on our view of the stable dividend yield and discounted valuation relative to peers.

Ford Motor (F): Reiterates 3 STARS (hold)

Analyst: Efraim Levy, CFA

Ford vehicle-sales volume in July fell 4%, year-to-year. Car units sold declined 16%, but trucks rose 2%. The company's important F-Series led sales of trucks higher with a 15% increase. We're disappointed by weakness in most of Ford's premium brands. We expect incentive activity to continue in the very competitive U.S. automobile market. Ford's sedan sales should benefit in the fourth quarter from the launch of two new mid-sized cars and the new Ford Mustang. Based on peer and historical p-e analyses, we have a 12-month target price of $15.

Tenet Healthcare (THC): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Cameron Lavey

The second-quarter loss of 45 cents per share, after a negative impact of 39 cents per share from nine items, vs. a year-ago's 14 cents loss, is 6 cents below our estimate. Results were hurt by 3.0% lower same-facility admissions and a 3.4% decline in same-facility outpatient revenue per visit. Bad-debt expense equaled 11.5% of revenues, above our 11.1% forecast. While we're cautious on shares because of volume declines, higher bad-debt expense, and ongoing litigation exposure, we believe that added downside is limited. We're raising our 12-month target price to $11 from $9, based on our asset-value estimate.

Vishay Intertechnology (VSH): Downgrades to 3 STARS (hold) from 5 STARS (buy)

Analyst: Stephanie Crane

Second-quarter earnings per share of 23 cents, vs. 2 cents is 1 cent above our estimate. Revenue rose 20%, up 1% from the first quarter, with bookings 23% higher. Book-to-bill ratio was 0.98 on slower orders since May amid shorter lead times, lower backlog from Asia and Europe, and lower distributor orders. Capacity constraints are affecting orders, leading Vishay to build in capacity by 20%. Our downgrade reflects concern over slow second-quarter order momentum, flat orders we see for the third quarter, and risks of a back-loaded year if momentum is slack until the fourth quarter. We're dropping our target price to $15 from $29, based on forward p-e and lower peer multiples.

Adobe Systems (ADBE): Reiterates 4 STARS (accumulate)

Analyst: Scott Kessler

We have also raised our estimates on the software maker. In a scheduled intra-quarter update, Adobe indicates it expects August-quarter revenues and earnings per share higher than our forecasts, reflecting strength in its Photoshop, Creative Suite, and Acrobat offerings. We are raising our August-quarter revenue projection by 2%, and our earnings per share estimates for the quarter to 38 cents from 36 cents and for fiscal 2004 (ending November) to $1.73 from $1.72, and for fiscal 2005 to $1.94 from $1.93. Demand for Adobe's products does not appear to have been negatively impacted by recent economic and software industry headwinds. Our 12-month target price, based on

discounted cash-flow and peer analyses, remains $50.

Walgreen (WAG): Reiterates 5 STARS (buy)

Analyst: Joseph Agnese

The drugstore chain reported that total July sales were 13.2% higher, slightly below our expectations, on an 8.2% rise in same-store sales and 8.7% growth in store count. Pharmacy comparable-store sales grew 9.3% as prescription volume grew only 3.0%, down from 6.6% in the prior month. Higher margin non-pharmacy sales rose 6.2%, above our estimate, benefiting from favorable weather, in our view. We believe Walgreen remains on track to reach its fiscal 2004 (ending September) goal of 350 net new stores. We are keeping our September-quarter earnings per share estimate at 32 cents and our 12-month target price of $43, based on our discounted cash flow and p-e analyses.

Premcor (PCO): Reiterates 5 STARS (buy)

Analyst: Tina Vital

The petroleum refiner posted second-quarter earnings per share of $1.61, vs. 50 cents, before items, 29 cents below our estimate and 40 cents below the Street forecast. The shortfall reflects reduced throughputs due to refinery maintenance, hedging losses, and greater-than-expected operating costs. We expect Premcor to benefit from favorable heavy differentials and continued strong crack spreads, which we see narrowing by about 17% in the fourth quarter from the third and remaining near that level in 2005. We raised our 2004 earnings per share estimate by 23 cents to $4.83 and cut our 2005 projection by 94 cents to $4.19 on the narrowing spread. We maintain our target price of $46, 11 times our 2005 earnings per share estimate.


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