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S&P Lowers Callaway to Avoid

Callaway Golf (ELY): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: William Donald

Although Callaway's second quarter earnings per share of $0.55 vs. $0.37 beat the Street's estimate by $0.12, the company estimated full 2002 EPS at only $1.02-$1.07 vs. the Street's $1.14 mean. Callaway said the shortfall reflects slow economies in key countries, a decline in rounds played in the U.S., and accelerated price competition.

The company sees full year revenues at $810-$820 million vs. $816 million for 2001. S&P is trimming $0.08 from the 2002 estimate, to $1.05, vs. $0.82 reported for 2001. Although S&P sees a rebound to $1.25 for 2003, Callaway's woes are likely to dampen the stock in the near term.

Johnson & Johnson (JNJ): Reiterates 4 STARS (accumulate)

Analyst: Herman Saftlas

The premier blue chip health care firm has been hit by news of a criminal investigation into its Puerto Rican plant that makes Eprex, a red blood stimulant used by kidney dialysis and chemotherapy patients. The drug is linked with a rise in the risk of rare red cell aplasia disease.

But S&P says the incidence is very low (estimated at 0.0001% of users). And even factoring out all Exprex sales from that plant, S&P says J&J still is undervalued for strong growth in many of its other drug and medical device lines. The company now is valued at a discount to big pharma group.

Photronics (PLAB): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Richard Tortoriello

Photronics warned that July quarter revenues will be $96-$98 million vs. the prior guidance of $110-$116 million, and sees earnings per share of $0.01 EPS or a loss vs. $0.11-$0.16 EPS.

S&P is slashing its EPS estimates to $0.15 for fiscal 2002 (Oct.), from $0.52, and to $0.63 for fiscal 2003, from $1.44. S&P believes this reflects a combination of cautious R&D spending by chipmakers amid slowing end-market demand, and aggressive pricing by Dupont Photomasks. That given, Photronics remains a strong contender, with shares worth holding at historical trough valuations of 1.0 times sales and 1.1 times its book value.

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