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S&P Says Buy Mohawk amid Robust Home Sales

Mohawk Industries (MHK): Maintains 5 STARS (buy)

Analyst: Raymond Mathis

April existing home sales reached a 5.79 million unit annual pace, a 7% increase over March, and a 9.5% rise vs. a year ago. Consumer confidence also edged up in May. S&P expects strong fundamentals, pent up demand, and acquisitions to keep driving Mohawk's sales higher. Although the cost of some synthetic fibers used in carpet is rising, Mohawk says it continues to defend margins by boosting related selling prices. Despite the news, the stock is off 5% from last week's high. At only 15 times S&P's raised 2002 earnings per share estimate of $4.45, S&P recommends buying the shares.

Great Atlantic & Pacific (GAP): Reiterates 3 STARS (hold)

Analyst: Joseph Agnese, Richard Joy

Shares are down 14% as the company announced the delay of its 10-K filing to complete a review of accounting issues related to vendor allowances and inventory. The problem appears to be timing related, and will likely result in downward revision of earnings for fiscal 2002 (Feb.). However, fiscal 2003 earnings should increase as previously applied credits are reversed and carried forward. S&P is keeping the fiscal 2003 earnings per share estimate at $0.80 pending the release of additional information. Shares are worth holding at these levels, given the company's turnaround progress.

Dynegy (DYN): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Craig Shere

Shares are up more than 7% on news that the company's chairman and CEO is stepping down. Led by interim chairman Glenn Tilton, who is also vice chairman of ChevronTexaco, S&P sees the new leadership making expeditious changes to shore up credit rating and investor confidence. A statement of support by ChevronTexaco also is encouraging. S&P now sees less than a 50% likelihood of a credit downgrade to "junk." At just 5.5 times S&P's recently lowered 2003 estimate of $1.80, Dynegy is among the cheapest in its space despite strong assets and backing of ChevronTexaco. S&P sees Dynegy among the leaders in an ultimate industry recovery.

Placer Dome (PDG): Maintains 3 STARS (hold)

Analyst: Leo Larkin

Shares are down 3% on a bid to acquire Australia's AurionGold. Placer would issue some 77.4 million shares for a merger valued at $1.1 billion. The deal would add about one million ounces of output, six million ounces of reserves, and supply resources of 16.2 million ounces. Placer tells analysts that is needs to convert resources to reserves to make the deal work. The deal cuts Placer's exposure to South Africa to 57% of reserves from 65%. But S&P thinks reliance on South Africa is still very high, and is concerned over Placer's ability to convert resources to reserves given the company's recent merger history. S&P is staying neutral despite bullish opinion on gold.

Tyco International (TYC): Maintains 3 STARS (hold)

Analyst: Michael Jaffe

Reports said Lehman Brothers made a $5 billion bid for financial services unit, but then got cold feet. Even if true, the price is well below the level sought by Tyco, and Tyco continues to speak to other potential bidders. A public offering of its unit remains Tyco's other option. While the June 2001 purchase of CIT Group has been a disaster for Tyco, S&P still thinks it will manage to dispose of the unit. With Tyco likely to make it through the next year without a cash crunch, and with shares trading at eight times S&P's $2.90 fiscal 2003 (Sept.) estimate, S&P thinks the worst is already priced in shares.

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