Northrop Grumman (NOC ): Maintains 3 STARS (hold)
Analyst: Robert Friedman
Although Northrop was finally able to acquire TRW, the $16 billion auto components and aerospace electronics maker, after a long and drawn-out battle, S&P still does not think acquisition will materially boost Northrop's financial fortunes. First, at 14 times TRW's three-year average pre-tax earnings, S&P doesn't believe Northrop got TRW on the cheap. Also, this acquisition could dramatically heat up competition in the space-base military electronics field, where Lockheed Martin and Boeing already have entrenched positions. Northrop is at modest premium to FMV.
Electronic Data Systems (EDS ): Maintains 4 STARS (accumulate)
Analyst: Richard Stice
The company ended discussions with Proctor & Gamble on a potential $1 billion a year contract, citing concerns with P&G's asking price for intangibles related to the business assets. News is surprising given S&P's view that as one of two finalists for the deal, EDS was the favorite. However, S&P still believes the company remains well positioned to capitalize on future outsourcing opportunities. With a robust business pipeline, and mid-20% return on equity, EDS is attractive at 10 times the 2002 estimate of $3.32, below peers and the broader market.
Lab Corp. (LH ) and Quest Diagnostics (DGX ): Maintains 5 STARS (buy)
Analyst: Phillip Seligman
Shares of both companies are under pressure amid a Medicare reimbursement proposal for physician services for 2003 and likely profit-taking on two winners in a bad market. Anatomic pathology is under 10% of Quest revenues; S&P sees similar scenario for Lab Corp. The bulk of pathology revenues are lab fees, not physician services fees. Medicare is a payer for only a small percentage of pathology revenues. Also, the proposed rule could be modified before it is issued. Fast-rising revenues in esoteric/genomics testing, acquisitions, and cost controls outweigh the immaterial impact. S&P's 2003 earnings per share estimates remain on changed, and S&P recommends investors buy on weakness.
Tripos (TRPS ): Downgrades to 3 STARS (hold) from 5 STARS (buy)
Analyst: Michael Santicchia
The company said that it expects a loss of basic earnings per share of $0.20 to $0.25 vs. S&P's EPS estimate of $0.10 due to unexpected customers' purchase postponements in the discovery software business and weakness in MetaLayer software licenses as the company missed delivery of a key milestone in the deployment of a complex system. He believe the negative outlook and uncertainty on pharmaceutical and biotechnology industries limit Tripos' revenue and earnings visibility over the next few quarters.
TRW (TRW ): Maintains 3 STARS (hold)
Analyst: Efraim Levy
TRW agreed to be sold to Northrop Grumman (NOC ) for $7.8 billion in stock, or $60 per TRW share. Northrop will also assume TRW's debt. This should not interfere with TRW's planned sale of its aeronautical systems business for $1.5 billion. Also, S&P expects TRW to either spin-off or sell its automotive unit. Although there were other bids for TRW, S&P doesn't expect a bidding war to ensue. The deal would make Northrop the second largest U.S. defense contractor with sales expected to exceed $26 billion. With consideration in Northrop stock, S&P says TRW is O.K. to hold.