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S&P Cuts Airlines

Airtran (AAI), Continental (CAL) and Northwest (NWAC): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: James Corridore

The cut reflects rising losses and the growing possibility of a war that will raise fuel costs and reduce international travel. Also, the slow economy has left business travel and industry pricing power at poor levels. While airline stocks have been crushed already this year, S&P sees no single positive indicator that the downturn is lessening in severity. While S&P feels these airlines are not at risk for bankruptcy, a weak industry environment and war risk warrants caution.

Electronic Data Systems (EDS): Reiterates 2 STARS (avoid)

Analyst: Richard Stice, Thomas Smith

EDS shares have fallen nearly 27% Tuesday on heavy volume. A brokerage analyst's note spurred speculation that the firm might face a sizable charge for losses in derivatives trading. Another analyst speculated that the SEC might inquire into accounting circumstances related to the company's big earnings warning on Sept. 18. A midday EDS response described "overall financial strength" and reiterated earnings and cash flow guidance. S&P recommend steering clear as a technical breakdown since EDS's earnings warning plays out.

Lehman Brothers (LEH): Reiterates 5 STARS (buy)

Analyst: Robert McMillan

The financial services firm posted August quarter earnings per share of $0.70 vs. $1.14, well below estimates. Net revenues fell 17% as lower principal transaction and investment banking results outweighed higher commissions. Previously strong fixed income segment was adversely affected by corporate scandals and a credit crunch, though it seems to be rebounding. However, S&P continues to believe Lehman is well positioned to benefit from an eventual recovery. Lehman is trading at 9.6 times the Street's $4.99 fiscal 2003 (Nov.) earnings per share estimate, and remains very attractive on good franchise and long-term prospects.

El Paso (EP): Downgrades to 1 STAR (sell) from 3 STARS (hold)

Analyst: Craig Shere

Shares are down 36% on news that an administrative law judge issued an opinion that El Paso manipulated the California natural gas market during the 2000/2001 energy crisis. The decision modifies prior rulings that manipulation couldn't be proved. Potential ramifications include fines, revocation of permits, and lawsuits. Also, there is potential for a cascading effect on El Paso's credit rating at a time of industry illiquidity. Surprises may keep banks from rolling over badly needed industry credit.

U.S. Physical Therapy (USPH): Maintains 4 STARS (accumulate)

Analyst: Mark Basham

Patient volumes have not returned to post-summer levels as quickly as usual. And S&P had expected new clinic openings (and costs) to be more evenly split between the third and fourth quarters rather than fourteen/seven that now seems likely. S&P is trimming the 2002 estimate to $0.68 from $0.70, and is cutting the 2003 estimate from $0.90 to $0.85. S&P also is trimming the long-term growth rate to 18%-22% from 20%-24% and cutting the $20-$22 price target to $17-$19, based on discounted cash flow analysis.

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