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Downgrading Homestake Mining to Hold

Homestake Mining (HM): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Leo Larkin

Shares are up following the news the company agreed to be acquired by Barrick Gold in a stock-for-stock deal that values Homestake at $8.71 per share. The deal is expected to be completed in Q4 2001, subject to regulatory approval. The new company will have $900 million in cash and will be the world's second largest producer with 79 million ounces of reserves. Homestake expects to achieve $55 million in annual savings by 2002. Homestake will have some 22% of its reserves hedged, which diminishes the company's appeal as a mostly unhedged gold play. Since S&P doesn't believe Barrick's bid is likely to be topped, S&P now rates Homestake only as hold.

USG Corp. (USG

: Upgrades to 3 STARS (hold) from 1 STAR (sell)

With asbestos lawsuits continuing at a high pace and legislation seemingly not in the near-term horizon, USG filed Chapter 11 bankrupcy to protect against a recent dramatic rise in its asbestos costs. Equity investors usually receive little to no value in bankruptcy reorganizations, but many are attracted to the gamble of purchasing low-priced shares. S&P is raising its recommendation but would only hold shares for a short time so that they can gain appreciation, which often follows an actual bankruptcy filing.

Paychex (PAYX): Maintains 4 STARS (accumulate)

Analyst: Jonathan Rudy

Paychex posted May-quarter EPS of $0.18 vs. $0.14, in line with estimates. Revenues rose 16%, fueled by a 14% growth in payroll service revenue, and a 24% rise in revenue from the broader Human Resources segment. Operating margin reached 38.3% vs. 35.4%, aided by increased high-margin add-on services. S&P sees margins widening slightly in fiscal 2002 (May), but is maintaining the fiscal EPS estimate at $0.82. Paychex has shown 10 consecutive years of 30%+ net income growth. With return-on-euqity at 38%, strong consistent growth and wide operating margins, shares of Paychex remain attractive.

Walgreen Co. (WAG): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Phillip Seligman

Walgreen posted May-quarter EPS of $0.21 vs. $0.19, a penny below the Street's estimate. Sales were up 16.7%, aided by 21.4%

higher comparable-pharmacy sales and 373 new stores. Gross margin was pressured by a greater proportion of pharmacy sales, along with the continued shift to third-party pharmacy sales. Also, non-pharmacy sales slowed on sluggishness in seasonal and

promotional products, which is unlikely to change until the economy improves. S&P is cutting its fiscal 2001 (Aug.) EPS estimate by $0.02 to $0.86, and is trimming fiscal 2002's estimate by $0.03 to $1.00. S&P thinks Walgreen is a worthwhile holding, given its expansion plans and the aging population.

Compaq Computer (CPQ): Maintains 3 STARS (hold)

Analyst: Megan Graham Hackett

The Wall Street Journal reported Monday that Compaq's CEO outlined its services and software push in a memo to employees. The goal is to get one-third of revenue from services in four years vs. the current rate of one-fitfh. Compaq will spend $500 million to buy computer services firms. In addition, the company plans to cut $200 million in annual operating costs, beyond the $600 million cut already announced. Compaq's shift to emphasize services is not new news, and its peers have similar strategies. S&P believes the memo suggests Compaq's hardware market's price pressures continue to challenge the company, but S&P applauds the formalization of the strategy, and Compaq's focus on costs.

Murphy Oil (MUR): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Tina Vital

Over the last few weeks, retail marketing margins have widened and refining margins have narrowed, leaving Murphy with a stable earnings stream through its expanding Wal-Mart retail gasoline network. Also, exploration success in the deepwater Gulf of Mexico (e.g. Front Runner South) and Canada could add 40,000+ barrels of oil equivalent (BOE) per day to the current 110,521 BOE/day production. Murphy has a strong balance sheet and production profile, there's substantial growth through its Wal-Mart arrangement, and shares are trading at nine times S&P's 2001 EPS estimate as well as at a 63% discount to the S&P 500.

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