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Downgrading Edison International

Edison International (EIX): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: James McCann

Given the recent rise in these speculative shares, S&P sees the upside potential reduced. While the Southern California Edison utility wants to avoid bankruptcy, a state senate bill approved on July 20 would leave it about $1 billion short of that needed to regain creditworthiness. S&P sees state assembly crafting a plan more closely resembling last April's agreement with the governor when it returns on August 20. Still, the outlook for a bill that can pass both branches remains uncertain.

Rainbow Media (RMG): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Thomas Graves

S&P generally is pleased with the tracking stock's 20% pro-forma cash flow growth from core networks in Q2. As expected, overall results were hurt by losses elsewhere. S&P looks for a subscriber base of various Rainbow Media nets to grow in the next couple of years, helping sales of advertising or sponsorships. As digital cable rolls out, S&P expects new opportunities for Rainbow Media programming. But S&P's bullishness on the tracking stock is limited by the extent of the premium EBITDA multiple seen given to business, plus the prospective sale of AT&T holdings of Rainbow Media.

Lamar Advertising (LAMR): 4 STARS (accumulate)

Analyst: Howard Choe

Lamar posted a Q2 loss $0.21 vs. a $0.23 loss -- a penny better than S&P's guidance. Revenues and EBITDA were up 11% and 12%, respectively. Same store revenues and EBITDA both rose 1%. The company's guidance for Q3 was much lower than S&P expected with proforma revenues and EBITDA down 7% and 18%, respectively. Lamar attributed the results to a weak July and a difficult advertising market. S&P sees the downside risk as short term; as cheap outdoor advertising should be the first to benefit from an economic pickup. S&P is lowering the 2001 loss per share estimate to $1.05 from $0.86. Shares are at a 10% discount to peers.

Nortel Networks (NT): Maintains 3 STARS (hold)

Analyst: Ari Bensinger

On the heels of rival Lucent's hugely successful $1.75 billion convertible preferred share offering last week, Nortel announced the planned sale of $1 billion in convertible senior notes. The seven-year notes are expected to carry a 4.75%-5.25% coupon and be convertible at a 25%-30% premium from the current price. Convertibles offer investors a less risky way to bet on Nortel's turnaround. Operationally, Nortel is successfully reducing inventory and accounts receivable. With about $5 billion in untapped credit facilities, S&P believes Nortel has ample room to maneuver through the current telecom downturn.

Solectron (SLR) 3 STARS (hold)

Analyst: James Corridore

Solectron will acquire C-MAC, a mid-sized EMS company, for $2.7 billion in stock. Solectron also expects Q4 fiscal 2001 (Aug.) revenues of about $3.0-$3.5 billion with $0.05-$0.09 cash EPS, and fiscal 2002 revenues of $16-$18.5 billion with $0.62-$0.66 cash EPS. Solectron's guidance is not out of whack with current expectations, but it reaffirms weakness. The acquisition is important for Solectron to keep up with trends towards providing end-to-end solutions, and expands its abilities in optical and complex manufacturing. Long term, Solectron should outperform, but given the tough conditions, S&P says investors should wait to add to positions.

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