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S&P Ups Restaurant Stocks

YUM! Brands (YUM) and CBRL Group (CBRL): Upgrades tp 4 STARS (accumulate) from 3 STARS (hold)

Starbucks (SBUX): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Dennis Milton

Over the past three months, share prices across the restuarant industry have fallen significantly, with some stocks dropping more than 20%. The recent slump has created more reasonable, even attractive valuations, given the industry's strong fundamentals, which include same store sales growth, controlled labor and food costs, and strong balance sheets. S&P is upgrading select stocks based on their current valuations.

Photon Dynamics (PHTN): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Richard Tortoriello

Photon will report June quarter results after the close Tuesday, and S&P sees the company meeting guidance and posting strong order growth. With 15" flat panel display prices under $500, demand has surged, especially for computer CRT replacement. A sales pause occurred recently, due to manufacturing under-capacity, which led to price increases, but S&P views this as a positive for Photon as manufacturers buy its equipment to increase capacity. S&P would now hold the stock at 23 times the raised fiscal 2003 (Sept.) earnings per share estimate of $1.21, vs. expected long-term growth of 25%.

Pfizer (PFE): Reiterates 4 STARS (accumulate)

Pharmacia (PHA): Reiterates 3 STARS (hold)

Analyst: Herman Saftlas

Repeating a successful strategy employed two years ago with the Warner-Lambert purchase, Pfizer is now acquiring Celebrex partner Pharmacia for $50B in Pfizer stock. The top global drugmaker will lead the industry in all major markets. S&P sees the combined annual revenue rising 10% over the 2002-2004 period. Boosted by $2.5 billion in cost synergies, S&P expects the adjusted earnings per share to grow 19% over the same period. Pfizer shares are reasonably valued relative to peers at 15 times S&P's 2003 EPS estimate of $1.85.

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