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Downgrading Verizon to Sell

Verizon Communications (VZ) : Downgrades to 1 STAR (sell) from 3 STARS (hold)

Analyst: Craig Shere

Thursday's reduction of New York state mandated wholesale telecom rates, which Verizon offers through Competitive Local Exchange Carriers (CLECs), has negative implications for margins and competitive position -- rates based on FCC rules challenged in a pending Supreme Court case. If the rules are upheld, there is a risk of contagion to other states. An regional bell operation company (RBOC) victory in litigation could spark renewed calls for structural separation. Verizon also is most expensive of three independent Bells on a price to its estimated cash flow basis. Low beta shares should underperform in a market recovery.

Dow Jones (DJ): Maintains 3 STARS (hold)

Analyst: William Donald

The company posted $1.24 2001 EPS, versus $3.32 before unusual charges of $0.45 & $4.67, respectively. The street was expecting $1.19. Revenues fell 19.5% and operating income plunged 63% before special items Dow Jones sees a 20% to 30% drop in Wall Street Journal advertising linage in Q1 with diluted EPS impact of $0.01 to $0.10. Dow Jones is cautiously expecting roughly 25% partial EPS recovery to about $1.57 before unusual items. In view of a weak Q1, S&P has have cut $0.12 from the 2002 EPS estimate, to $1.63, but expects a healthy rebound throughout 2003. S&P sees 2003 EPS at $2.05. Dow Jones appears fully valued.

LSI Logic (LSI): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Thomas Smith

The maker of data storage systems posted a Q4 loss per share $0.14 (before goodwill and charges), vs. EPS of $0.34, $0.04 above consensus. Revenues fell 46% year over year, up 2.3% quarter over quarter. S&P expects revenue to be flat to 3% higher in Q1, confirming the September quarter as the revenue bottom for the chip cycle. Revenue mix is 33% consumer, 27% communications, 27% storage and 13% storage systems. Renewed cost cutting lowers the breakeven level further. S&P is raising its estimates to a loss of $0.17 per share (before goodwill and charges) in 2002, from a loss of $0.30. S&P also is setting a $0.45 2003 EPS estimate. Forward price-to-earnings is 32 times this estimate, which is attractive given the bright prospects for 2004-2005.

Siebel Systems (SEBL): Maintains 5 STARS (buy)

Analyst: Jonathan Rudy

The business software company posted Q4 EPS of $0.13 vs. $0.20, $0.04 above estimates. Revenues increased 12% sequentially, well above S&P's estimate. License revenue was particularly strong, with lower margin service revenue lower than expected. The company experienced strength in financial, pharmaceutical verticals, and internationally. Operating margin improved to the 20% level, and S&P expects further widening. Seibel continues to strengthen its position as a market leader. S&P is raising the 2002 estimate to $0.62, from $0.56. With an exceptional balance sheet, momentum with Siebel 7 upgrade, S&P says buy this leader in customer-relationship management software.

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