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BellSouth Cut to 'Avoid'

BellSouth (BLS): Downgraded to 2 STARS (avoid) from 4 STARS (accumulate)

Analyst: Craig Shere

The shares were solidly lower today as BellSouth cut its guidance on Latin American exposure and delayed long distance entry. S&P is lowering its 2002 EPS estimate to $2.42, from $2.58. This excludes $200-$230 million in first quarter charges relating to currency devaluations. With likely negative international revenue growth, and 40%-owned Cingular Wireless operations slowing, the drivers for an improving outlook are difficult to discern. With the stock's

beta -- a measure of its volatility -- under 0.5, continuing forex losses and anemic EPS growth, the company should underperform the S&P 500 during the economic recovery.

JC Penney (JCP): Upwngraded to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Karen Sack

The company's fourth quarter EPS was better than expected. Penney posted $0.39 EPS vs. a loss of $0.18, before one-time items. The results reflect solid sales gains and strong improvement in operating income at its department stores, catalog and drug stores. The company earned $0.39 for fiscal 2002 (Jan.) vs. a loss of $0.44, before items. Penney did a good job in managing inventory and cutting overhead by consolidating functions. It is boosting fiscal 2003 capital spending 30% to $850 million, improving distribution centers and reconfiguring stores. S&P still sees fiscal 2003 EPS of $0.85, and a continued turnaround in all businesses.

American International Group (AIG): Reiterates 4 STARS (accumulate)

Analyst: Catherine Seifert

The shares were lower as a nervous market reacted to reports AIG has been subpoenaed by the Securities and Exchange Commission regarding PNC Financial Services' structured-finance case. AIG entered into three structured finance deals with PNC, but has appropriately consolidated them on its balance sheet. S&P also ties the weakness to concerns over Chairman Greenberg's health, and succession issues. S&P does not share these concerns, but outlook for AIG is tempered by general market wariness about opaque accounting, which is an issue for all insurers.

Barnes & Noble (BKS): Reiterates 5 STARS (buy)

Analyst: William Donald

Helped by better-than-expected retail sales, Barnes & Noble expects to report $1.28 consolidated EPS for just-ended fiscal 2002 (Jan.), well ahead of the $1.18 Wall Street consensus estimate. The company expects first half fiscal 2002 same-store superstore comparisons to gain 2%-3%, an second half comps to rise 4%-5%. It anticipates a 46% surge in consolidated fiscal 2003 EPS to $1.87, reflecting a 24% jump in retail bookstore and gamestore profits to $2.11. The company also sees a 34% drop in its share of online losses to $0.23 from $0.35. S&P thinks the shares are undervalued, trading well below its $40 12-month price target.

Aetna (AET): Still 3 STARS (hold)

Analyst: Phillip Seligman

The company posted a fourth quarter loss of $0.59 vs. EPS of $0.20, before special items, $0.06 below S&P's estimate. Healthcare premiums were off 9.3% on 16.8% fewer risk members, offset by higher yield. Aetna posted a healthcare operating loss vs. a profit in the third quarter on seasonally higher costs. But its medical cost ratio was below the previous quarter's. S&P sees cost initiatives, rate hikes, new products, and the culling of unprofitable products and markets improving the chances for Aetna's hoped-for return to profit in 2002 (excluding gains from goodwill nonamortization). S&P sees the company in the black in the year's second half, but visibility remains low and 2002 trends too new for refined company guidance until its first quarter conference call.

Synopsys (SNPS): Keeping 2 STARS (avoid)

Analyst: Richard Tortoriello

The electronic design automation software company reported January quarter EPS before goodwill of $0.27, vs. $0.19, in line with Wall Street expectations. Revenues were up 12%, but down 4% from the October quarter. Synopsys saw weaker than expected spending in North America. The company believes it is gaining share over its larger competitor Cadence. However, S&P still sees significant risk in Synopsys' acquisition of Avant!, with a large civil suit pending. Trading at 4.6 times sales and 6.3 times book value, Synopsys sells at a premium to its peers. With S&P's EPS estimates coming down, it sees Synopsys shares at risk.

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