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S&P Upgrades eBay and PayPal on $1.5 Billion Stock Deal

eBay (EBAY) and PayPal (PYPL): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Scott Kessler

S&P likes eBay's proposed buy of PayPal (0.39 eBay shares for each PayPal share). EBay will be able to shutter its money-losing Billpoint and become the top provider of payments on its sites and the Internet. PayPal will be promoted and gain share on eBay's sites, and have more resources to pursue international, government and corporate opportunities. Without PayPal, eBay trades at an estimated price-earnings-to-growth ratio of 1.0, well below the S&P 1500 Internet Software & Services Industry. EBay also preannounced second quarter earnings per share above the Street' estimates.

RehabCare Group (RHB): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Mark Basham

S&P's upgrade is primarily a valuation call as RehabCare is down 22% year-to-date, even though S&P is underweight in the healthcare sector. S&P is raising the 2002 and 2003 estimates by 5% to $1.36 and $1.78, respectively, to reflect profit recovery in RehabCare's staffing unit. S&P also is raising the price target slightly from $26, to $26-$28, or about 20 times the 2002 estimate. With projected 22%-32% potential upside in RehabCare based on S&P's target price, and with the view that the downside from here is limited, S&P says it's O.K. to add to positions.

Mentor Graphics (MENT): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Richard Tortoriello

The software company sees second quarter revenues of $135 million vs. the previous guidance of $153 million, and a loss per share of $0.40, including about $0.35 in acquisition-related charges and write-offs, vs. $0.16 earnings per share consensus. The company blames several large transactions that failed to close at the end of the quarter. S&P believe this shortfall signals more cautious R&D spending by chipmakers given economic uncertainties. S&P is reducing core EPS estimates to $0.16 for 2002, from $0.21, and sees $1.26 for 2003, from $1.66. However, the shares are worth holding at 1.3 times sales -- near historic lows.

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