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Highflyer Broadcom Can Still Soar

Broadcom Corp. (BRCM): Upgrade to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Thomas Smith

The company posted Q4 EPS 0.32 (pro forma) vs. $0.13, a penny above the Street estimates. Revenues were up 132%, 18% from Q3. The report was positive by the chipmaker serving broadband communications markets. Home and office markets for high-speed digital data transmission is still a high-growth area as other chip markets are stalling. A string of acquisitions helped create advantage for BRCM, enabling the company to offer a more complete set of products. Although Broadcom's shares are pushing the 100 times forward P/E barrier, S&P sees this highflier moving up in the near term. The stock is suitable for accumulation by aggressive growth investors.

Lucent (LU): Upgrade to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Ari Bensinger

The telecommunications firm posted fiscal Q1 loss per share of $0.30 vs. year-ago EPS of $0.33, in line with expectations. Lucent has set a comprehensive restructuring plan, including reducing headcount by 10,000, eliminating certain product lines and upping use of contract manufacturers.

The company's actions will reduce its annual expense rate and working capital by $2 billion. Lucent will take a $1.2-$1.6 billion charge in Q2. S&P believes Lucent's actions will create a leaner company that is likely to be more responsive to new product opportunities..

S&P also sees a rise in investor interest as Lucent prepares its Q2 microelectronic spin-off (up 50% in Q1).

Norfolk Southern (NSC): Downgrade to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Richard Stice

The freight railroad company posted Q4 EPS of $0.11, before charge, versus $0.08, $0.04 above lowered pre-announcement. The slowing U.S. economy, sharply higher fuel prices and ongoing difficulties integrating Conrail assets hurt results. Norfolk Southern reduced headcount by 3,500 in 2000 and will lay off 1,000-2,000 employees in 2001.

Business conditions are expected to be soft in the first half of '01. S&P lowered the company's 2001 EPS estimate by $0.30 to $1.10. With continued weakness in demand, S&P recommends avoiding shares until a turnaround scenario emerges.

Kimberly-Clark (KMB): Reiterate 5 STARS (buy)

Analyst: Howard Choe

Excluding a $0.02 restructuring charge, KMB posted Q4 EPS of $0.87 vs. $0.79, which was in line with Street estimates. Sales were up 5.1%, a solid rise given tough comparables and unfavorable forex effects. December market share data indicates the company is still gaining market share in most of its categories. The planned acquisition of the No. 2 European diaper brand Linostar will bolster Kimberly-Clark's Euro presence. Good cost controls led to record Q4 operating margin of 19.2%. S&P is confident in KMB's ability to hit 2001 targets. The stock is cheap at just 16 times S&P's 2001 EPS estimate of $3.80 and a more than 20% discount to its peers.

QLogic Corp. (QLGC): Initiate coverage with 3 STARS (hold)

Analyst: Jim Corridore

The provider of connectivity solutions for Storage Attached Networks (SANs) is benefiting from explosive growth for networked storage. QLGC posted Q3 fiscal 2001 (March) EPS of $0.28 vs. $0.15, beating the Street by $0.02. Revenues were up 73%. QLGC sees no evidence of an industry slowdown. The company expects fiscal 2001 EPS of $1.02 and fiscal 2002 EPS of $1.40-$1.50. QLGC is well positioned in the SAN arena. However, at 65 times the high end of 2002 guidance and growing EPS at about 35% long term, we feel the shares are hard pressed to outperform the market in the next six to 12 months.

SCI Systems (SCI): Downgrade to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Jim Corridore

The company posted fiscal Q2 EPS of $0.37 vs. $0.34, which was worse than expected. Revenues were up 20% vs. the 18% target, but margins were hurt by component issues, a PC slowdown and a shift in product mix. SCI is guiding downward for the rest of the year and now expects fiscal 2001 (June) revenues of $9.3 billion and EPS $1.47 EPS, vs. our prior estimates of $10.5 billion and $1.74. SCI is seeing a slowdown but its competitors are growing strongly. Though SCI is trading at 21 times its fiscal 2001 EPS guidance, S&P sees better opportunities in higher-growth competitors like Sanmina and Solectron.

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