IDEC Pharmaceuticals (IDPH ) and Biogen (BGEN ): Reiterates 3 STARS (hold)
Analyst: Frank DiLorenzo
The two firms plan a merger, with each Biogen share exchanged for 1.15 shares of IDEC. S&P is surprised by the move, considering Biogen's core Avonex franchise is under pressure from new competition. Also, Biogen announced that second-quarter earnings per share will be below expectations. Aside from Biogen's multiple sclerosis drug Antegren, S&P thinks the combined pipeline will be average. Biogen sees 15% revenue growth, and 20% cash earnings per share growth going forward on a combined basis. S&P thinks other biotechs with similar multiples have better growth prospects, such as Amgen, MedImmune, and Genzyme. On S&P's preliminary valuation of a price-earnings-to-growth of 1.6 times, S&P thinks the merger deal is fully valued, compared to peers.
Rare Hospitality (RARE ): Initiates with 4 STARS (accumulate)
Analyst: Dennis Milton
Rare Hospitality operates more than 210 casual dining restaurants under the names LongHorn Steakhouse, Bugaboo Creek Steakhouse, and The Capital Grille. S&P expects annual revenue growth of more than 10% over the next several years, due to expansion and same-store sales growth. Leveraging an increased sales base should allow margins to expand. S&P's 2003 earnings per share estimate is $1.76 -- a 16% increase from 2002. At 18 times this estimate, shares trade in line with peers. S&P believes a premium is warranted due to Rare Hospitality's excellent growth prospects, debt-free balance sheet, and solid operating history.
Calpine (CPN ): Reiterates 3 STARS (hold), and Mirant (MIR ): Maintains 2 STARS (avoid)
Analyst: Craig Shere
Shares of leading energy merchants are off 4% to 8% on Monday concerns as about bankruptcy are revived. On Friday, Calpine was placed on a negative credit watch by Moody's. Also, Mirant said it received a default notice for failure to file a first-quarter 10-Q report. Mirant expects filings within a 30-day grace period, but is asking creditors to approve a pre-packaged bankruptcy plan (in the event a creditor exchange offer fails). S&P still sees the multi-utilities and unregulated power industry outperforming the S&P 500 in the coming year, but thinks energy merchant volatility can cause temporary hiccups.
Walgreen (WAG ): Maintains 4 STARS (accumulate)
Analyst: Joseph Agnese
Walgreen reported May-quarter earnings per share of 29 cents, vs. 25 cents, in line with the Street's consensus. Comp-store sales rose 8.2%, driven by a 12% rise in prescription comp-store sales. Results are benefiting from a favorable margin impact of generic drug conversions despite lower sales prices. S&P believes store expansion plans are on track, with Walgreen set to open 425 new stores in fiscal 2003 (Aug.) and 450 stores in fiscal 2004, and will operate 7,000 stores by 2010. At 28 times S&P's fiscal 2003 estiamte of $1.16, above peers, S&P believes this clear industry leader should benefit from favorable industry trends and long-term earnings per share consistency.
Tenet Healthcare (THC ): Downgrades to 2 STARS (avoid) from 3 STARS (hold)
Analyst: Frank Connelly
Tenet warned that second-quarter operating earnings per share will be sharply below analysts' estimates due to lower-than-expected revenue trends and higher costs. S&P now sees second-quarter and 2003 earnings per share of 25 cents and $1.05, vs. 34 cents and $1.41 previously. Tenet expects weakness persisting into 2004's first half. The company noted that negotiations with managed care are increasingly difficult, and also sees 2003 inpatient volume up in the 2% range, with flat same-facility outpatient volume. S&P expects Tenet to underperform the hospital industry and the overall market for the next 6 to 12 months.
Cummins Engine (CUM ): Downgrades to 1 STAR (sell) from 3 STARS (hold)
Analyst: James Sanders
Year-to-date, shares of Cummins are up 40%, vs. 13.2% for the S&P 500, which S&P attributes to an improving outlook for the truck manufacturing industry. S&P agrees that this end market is showing signs of a recovery, but doesn't thinks the upswing will be as dramatic as anticipated. Moreover, the upcoming release of Caterpillar's Environmental Protection Agency compliant engine will likely present additional challenges for Cummins. Finally, S&P's discounted cash-flow model, with a long-term average annual free-cash growth rate of approximately 4%-5%, indicates shares are 40% to 45% overvalued.
American Management Systems (AMSY ): Maintains 3 STARS (hold)
Analyst: Richard Stice
American Management announced that it has settled all outstanding litigation and claims with the Federal Retirement Thrift Investment Board, ending a nearly two-year legal dispute. As a result, American Management will incur a $45.5 million pretax charge in the second quarter. S&P views the settlement positively, and thinks it eliminates a major distraction and frees up business resources. However, given S&P's view of lackluster end markets, and with shares trading at a premium to the S&P SmallCap 600 Index on a p-e and p-e-to-growth basis, S&P would not add to existing positions at this time.