R.J. Reynolds Tobacco (RJR ): Reiterates 3 STARS (hold)

Analyst: Richard Joy

The company announced plans to divest two non-tobacco businesses, eliminate 635 jobs, and take a fourth quarter after-tax charge of $145 million. Given the revised guidance, S&P is reducing its fourth quarter earnings per share estimates by 15 cents to 41 cents and is cutting the 2002 estimate to $6.05. S&P sees 2003 earnings per share at $6.35. With strong cash flows and $2.2 billion in cash on its balance sheet, S&P thinks R.J. Reynold's substantial share repurchase activity will continue. Shares are trading at 6.5 times S&P's 2003 earnings per share estimate, making the shares worth holding given the company's strong balance sheet, attractive 9.3% dividend yield and its focus on shareholder value.

Gilead Sciences (GILD ): Maintains 5 STARS (buy)

Analyst: Frank DiLorenzo

Gilead plans to acquire Triangle Pharmaceuticals at $6 per share, or $464 million. Triangle in September filed a New Drug Application for its Coviracil anti-HIV drug. S&P feels it could be approved in the second half of 2003. Assuming the deal is approved, Gilead says the Triangle deal would be dilutive in 2003, neutral in 2004 and accretive in 2005. S&P thinks $200 million in peak annual sales is necessary to justify the acquisition price; S&P feels that the antiviral focus of the deal makes strategic sense and would improve Gilead's thin pipeline. However, the risk is now higher and Gilead is appropriate only for aggressive investors.

Office Depot (ODP ): Maintains 4 STARS (accumulate)

Analyst: Tuna Amobi, Yogeesh Wagle

Office Depot warned that fourth quarter sales remained below expectations amid soft small business customer demand. However, it is still comfortable with the Street's consensus fourth quarter earnings per share estimate of 22 cents, based on continuing gross margin improvement and tight expense control. Despite conditions of market saturation and stiff competition in the U.S. office-supply superstore arena, S&P sees 4% to 5% sales growth in 2003 fueled by gains in the office-delivery business and overseas expansion. At 14 times S&P's $1.15 2003 estimate, below key peers, S&P says the stock has appeal.

Syncor (SCOR ): Downgrades to 3 STARS (hold) from 1 STAR (sell)

Analyst: Robert Gold, Phillip Seligman

Cardinal Health has agreed to proceed with the acquisition of Syncor on revised terms. It will swap a 0.47 share of Cardinal Health for each share of Syncor, which is trading at about $29 late Wednesday, or about $810 million plus assumed debt. This reduction from the original $867 million price tag reflects subsequent disclosure of about $500,000 in improper payments made by Syncor overseas. The $2.5 million in fines and penalties related to these events will apparently be covered by Syncor Chairman M. Fu through the surrender of personal Syncor holdings.

Disney (DIS ): Maintains 3 STARS (hold)

Analyst: Thomas Graves

Disney's stock is down Wednesday after a disappointing theatrical debut of Treasure Planet pushed down the company's profit expectation for the December quarter. S&P is adjusting the fiscal 2003 (Sept.) earnings per share estimate to 68 cents, from 69 cents, vs. a pro forma 53 cents in fiscal 2002. Based on projected fiscal 2003 earnings per share, Disney shares are at close to a 50% price-earnings premium to the S&P 500. S&P thinks this adequately anticipates a sizable profit upturn during the next couple of years. Also, S&P has some concern about the company's historic levels of unexpensed options.

Hewlett-Packard (HPQ ): Maintains 3 STARS (hold)

Analyst: Megan Graham Hackett

At an analyst meeting, the company said it sees 2% to 4% revenue growth in fiscal 2003 (Oct.). While the targets are above S&P's estimate, the company's guidance is below its prior 4% to 6% forecast. In addition, H-P expects $3 billion in annualized cost savings from the merger by the end of fiscal 2003 -- one year ahead of plan.

Neither announcement was surprising, and S&P isn't changing its forecast. H-P didn't raise its January quarter guidance and still sees holiday season sales one-third below traditional levels. While H-P's long-term strategic positioning still is in question, with shares trading at a price-sales ratio of 0.8, S&P says H-P is O.K. to hold.

Integrated Device Technology (IDTI ): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Thomas Smith

The company warned that December quarter revenue would be likely to fall 12% to 14% quarter over quarter, vs. the prior guidance of a 5% to 7% decline. Demand remains soft and customer inventory adjustments hurt results. The company reduced its staff by 5% in October.

Integrated Device guided pro forma December quarter earnings per share to a loss of 17 cents to 21 cents; about eight cents to 10 cents of this loss is derived from one-time costs that are unlikely to be repeated. Also, the company is lowering its pro forma earnings estimates to a 30 cent loss from a 10 cent loss for fiscal 2003 (March), and to breakeven from 15 cents earnings per share for fiscal 2004. Given the earnings setback, shares might retreat to a historical low valuation near 0.7 times its book value of $9.29.

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