Nortel Remains Attractive

S&P says the telecom giant is well-positioned to weather any letdown in tech spending. Plus: opinions on Microsoft and Ebay

Nortel Networks (NT ): Reiterate 5 STARS (buy)

Analyst: Ari Bensinger

Q4 EPS $0.26 vs. $0.21, in line. Revenues up 35%, gross margin rose 120 basis points. Optical sales grew 120% in '00, exceeding original $10 billion annual target. NT ended '00 with leading market share in long haul and metro optical networking market. Given current economic uncertainty, NT prudently guides '01 EPS growth to 30%, at low end of previous 30%-35% guidance. With broad and balanced portfolio, NT well positioned to weather any temporary spending letdown. Market leader attractive at P/E less than 2X long term growth rate.

Microsoft Corp. (MSFT ): Reiterate 3 STARS (hold)

Analyst: Jonathan Rudy

Posts FY (Jun.) Q2 EPS of $0.47 vs. $0.44, in line with lowered expectations. Revenues were up 8% to $6.6 billion, slightly above estimates. See high single-digit revenue growth for remainder of FY 01. Co. cautious on FY Q3 PC sales. however, remains upbeat on opportunities for server products. Investment income was $751 million. Keeping our FY 01 EPS est. at $1.80, $1.40 excluding investment income. At 40X our FY 01 EPS estimate, ex. investment income, with 10-12% core business growth, would not add to positions.

Schlumberger Ltd (SLB ): Upgrade to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Tina Vital

Q4 EPS $0.41 vs. $0.11, in line with consensus, on 2.9% more shares. Revenues up 23%, reflects 33% growth in Oilfield Services (M-I rig count up 25%), led by North America. Operating margins widened nicely. Outlook favorable on '01 exploration & production spending hikes of least 20%; SLB should benefit from its reservoir technologies. Raising '01 EPS by $0.03 to $1.98, see '02 at $2.69. Shares trade at 37X our '01 EPS estimate, at premium to peers, but with over 35% projected earnings growth, accumulate.

eBay Inc (EBAY ): Reiterate 4 STARS (accumulate)

Analyst: Scott Kessler

Excluding non-cash charges, Q4 EPS $0.09 vs. $0.02, penny over high-end S&P estimate. Revenues rose 81%, driven by strength in key metrics: users, gross merchandise sales and listings.. Margins widened, reflecting customer support and website operation improvements. Fixed-price "Buy It Now" feature, unit doing well. In one year, has gone from launch to 3 consumer e-commerce site. Very optimistic about EBAY, as aggressively moving into new categories and geographies, poised to benefit from slowing economy. Accumulate EBAY at 67X '02 est. $0.70.

Integrated Device Technology (IDTI ): Upgrade to 5 STARS (buy) from 3 STARS (hold).

Analyst: Thomas Smith-CFA

Posts FY Q3 EPS of $0.80 vs. $0 .31, below $0.85 consensus. Revenue rose 58% from year ago, 3.8% from FY Q2. Gross margin up 110 basis points to record 61.6%. Maker of chips for communications equipment suffering slower revenue growth as inventory glut is worked off. But outlook should improve significantly by mid-2000. On track for wider margins. Ample cash for share buybacks. Shares undervalued at 17 times our $3.37 calendar '01 estimate, with 28% L/T growth rate. Think P/E multiple nearer 25 times is justified.

Iomega (IOM ): Downgrade to 2 STARS (avoid) from 3 STARS (hold) Analyst: Jim Corridore

Posts Q4 EPS of $0.03 before one-time tax credit, vs. $0.08. within range IOM preannounced on 1/5. Revenues fell 24% on decreased sales of ZIP and Jaz products. ZIP drive and ZIP disk volumes down markedly. Gross margin declined to 33.5% from 37.0% (before charge); SG&A and R&D expenses were sharply higher. Feel that worries about IT spending and economic slowdown add to poor execution, and slowing demand for IOM's core products will create heightened risk. Despite low share price would look elsewhere for value.

Union Pacific (UNP ): Downgrade to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Richard Stice

Posts Q4 EPS of $0.90 before charges, vs. $0.95, in line with Street estimates. Results hurt by economic slowdown, higher fuel costs and adverse weather, offsetting gains from real estate sales and its Overnite Transportation unit. Q4 rail revenues weak for agricultural, chemical and industrial products. Lowering our '01 EPS estimate by $0.70, to $3.80. While UNP's P/E and price to EBITDA ratios are consistent with its peer group, believe economic factors will result in underperformance.

Burlington Resources (BR ): Upgrade to 4 STARS (accumulate) from 2 STARS (avoid)

Analyst: Ephraim Juskowicz

Posts Q4 recurring EPS $1.18 vs. $0.39, 8% above consensus, as higher price realizations offset lower production. With expectation of continued strong gas prices, to which BR highly levered since gas represents 80% of reserves, raising our '01 EPS estimate from $2.66 to $3.40. With new management hired from well-regarded former Vastar Resources, $1 bil. share buyback program recently set, low debt/capital and attractive finding and development costs, BR deserves premium multiple of 5.1X est. cash flow.

EMC Corp. (EMC ): Upgrade to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Jim Corridore

In light of recent strong EPS reports in storage space, increasingly confident EMC will post good results when they report on 1/23. Early indications are that storage has not been impacted by IT spending cuts. For EMC Q4 we expect $0.24 EPS; Street consensus is $0.23. We expect 35% revenue growth in '01, and EPS of $1.10. Aggressive EPS estimate would represent 41% growth over our '00 est. See EMC continuing to grow market share. Despite premium to market, recommend stock of storage leader for superior appreciation.

W.R. Grace (GRA ): Downgrade to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Richard O'Reilly

Worried about extent of growing asbestos liability. Co. may take Q4 charge to reflect adverse trends in new claims, which in '00 both exceeded '99 and was greater than expected. Co. last took special charge for asbestos in '98. still needs to renegotiate new credit facility due in May. GRA also estimates Q4 sales and earnings were lower than expected, cites adverse market trends, weak Euro and higher natural gas costs. Cutting our Q4 EPS est. to $0.40 before charges, from $0.47, vs. year-ago $0.66, '00's to $1.76 from $1.83.

ADC Telecommunications (ADCT ): Downgrade to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Ari Bensinger

Sees Q1 FY 01 (Oct.) sales at $800 mln., EPS $0.05-$0.07, below our $850 mln., $0.12 estimate. Lower sales & slower than expected cost reductions will squeeze Q1 gross margins to low 40% range, well below our 51% est. Given economic uncertainty & lower domestic carrier spending, reduces FY 01 guidance to 15% EPS growth, from previous 25%-30% guidance. Co. to implement expense controls. Despite lower FY 01 guidance, ADC remains well positioned for long term growth in broadband "last-mile" market.

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