Upgrading Merck

Also: analysts' opinions on Darden Restaurants and Washington Mutual; plus others

Merck (MRK ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Herman Saftlas

The pharmaceutical giant lowered its Q2 EPS guidance to $0.77-$0.78 and for full-year 2001 to $3.12-$3.18. The Street had expected $0.81 and $3.20, respectively. Merck attributed the shortfall to a negative foreign-exchange impact and less-than-expected growth in its Vioxx anti-arthritic drug. Merck still sees Vioxx sales of $3.0-$3.5 billion, up from $2.2 billion in 2000. Gains in Vioxx, Zocor, Fosamax, Cozaar, and Singulair will more than offset generic erosion in the off-patent drugs. Merck remains a powerhouse in the top-tier global drug sector, yet now trades at 21 times S&P's estimates and 2001 EPS, at the bottom of the drug-group range.

Darden Restaurants (DRI ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Karen Sack

The restaurant-chain operator posted better-than-expected May-quarter EPS at $0.50 vs. $0.43. Same-store sales rose 7.1% at its Olive Gardens units, and 3.8% at its Red Lobster units. Expenses were held in check. S&P was impressed by lower labor costs as a percent of sales, in spite of rising wage rates. Operating income rose 12%. Full-year fiscal 2001 (May) EPS rose 19% to $1.59. Darden forecasts 15%-20% EPS growth in each of the next few years, boosted by the rollout of new formats Bahama Breeze and Smokey Bones BBQ Sports Bars. Darden is using cash flow to repurchase shares.

Washington Mutual (WM )and Dime Bancorp (DME ): Maintains 4 STARS (accumulate)

Analyst: Erik Eisenstein

The diversified financial services company Washington Mutual is in talks to acquire Dime for about $5 billion in cash and stock. The deal is unconfirmed, but would offer Dime shareholders only a slight premium. At first blush, S&P says the deal is positive, and would enhance Washington Mutual's leadership in mortgage origination capacity and allow it to strategically acquire Dime's sizable portfolio of non-residential loans, which would help Washington Mutual establish a banking presence in New York. The deal also could expedite the pace of consolidation in the thrift industry.

Bed Bath & Beyond (BBBY ): Maintains 4 STARS (accumulate)

Analyst: Maureen Carini

The home-goods company posted Q1 EPS of $0.10 vs. $0.08, in line. Total sales were up 24.4%, aided by 71 added stores and a healthy 4.4% gain in same-store sales. Gross margins were aided by better buying and efforts to limit markdowns. Operating margins improved on higher volume and cost controls. The company is pleased with the results, particularly in light of a flood of sales by a liquidating competitor. Rate cuts and tax rebates should spur renewed consumer spending in the second half. Though the company is well-positioned to expand its share of the $75 billion home furnishings market, enthusiasm is tempered by a price-to-earnings ratio of 42 times S&P's $0.72 fiscal 2002 (Feb.) estimate.

Micron Technology (MU ): Maintains 3 STARS (hold)

Analyst: Thomas Smith

The chipmaker posted a Q3 fiscal 2001 (Aug.) $0.50 loss vs. $0.50 EPS, well below the consensus $0.15 loss. The rise of 20% in megabits of memory shipped was more than offset by a 35% decrease in the average selling price per megabit. A pre-tax inventory writedown of $260 million knocked the results even lower. Micron completed the acquisition of a Kennametal wafer plant on April 30, and this should lower the production cost per wafer. S&P is cutting the fiscal 2001 (Aug.) EPS estimate to $0.02 from $0.60; and cutting the fiscal 2002 EPS to $0.90 from $1.40. DRAM pricing is still weak. S&P remains neutral on the shares until chip inventories clear further.

Symantec (SYMC ): Maintains 5 STARS (buy)

Analyst: Jonathan Rudy

The software company says Q1 fiscal 2002 (March) revenues will be between $225-235 million and operating EPS will come in between $0.39-$0.47, vs. S&P's estimates of $255M revenues and $0.67 EPS. The company cites a slowdown in consumer and small business spending in North America and Europe. Foreign exchange currency also had a negative impact. Despite the negative news, Symantec has gained market share vs. Network Associates, and will benefit from Windows XP's positive impact on the PC industry. S&P is lowering the fiscal 2002 EPS estimate to $2.60. At 17 times S&P's 2002 estimate, shares are trading at a discount to both the long-term growth rate and security software peers.

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