Hang on to Ralston-Purina
Ralston-Purina (RAL ): Reiterate 3 STARS
Analyst: Richard Joy
Agrees to merge with Nestle. NSRGY will pay $33.50 per share cash, richly valuing RAL at enterprise value of $10.3 bln., or 15.7X '00 EBITDA. High price justified by RAL's dominantRAL position in high-margin, fast-growing North American pet products market.. Believe deal makes strategic sense, as NSRGY's strong int'l presence complements RAL's strong North American operations. Annual cost savings are expected to reach $260 mln. by '03. Given low risk of deal falling through, would hold RAL shares to capture additional cash premium to current price.
Citigroup Inc (C ): Reiterate 5 STARS (buy)
Analyst: Stephen Biggar
Posts Q4 EPS of $0.65 vs. $0.58, in line. Large gain at global consumer unit helped by credit cards and annuities, good credit trends. Offset by some weakness in investment banking, brokerage as seen by other industry participants. Co. notes already seeing contributions from Schroders and Associates First acquisitions. C still clearly benefiting from expanded product set, distribution channels. See momentum sustainable on refined strategies and integration efforts. Raising our '01 EPS estimate by $0.05, to $3.10.
Xircom (XIRC ): Reiterate 3 STARS (hold)
Analyst: Megan Graham-Hackett
As Intel to acquire the company for $25/share in an all-cash deal of $748M. At 1.4X FY 01 (Sep.) revenue, view price as fair. XIRC's PC cards for laptops fits in with INTC's push into mobile computing, complements INTC's Ethernet NIC business. firms have long history of working together. deal to be completed Q1 '01. Separately, XIRC posted Q1 FY 01 EPS of $0.01 vs. Street mean of $0.14, our $0.13 est. $120M in rev., $15M below est. margins hurt by mix shift to embedded solutions. INTC's silicon expertise should help grow XIRC's embedded business.
QUALCOMM (QCOM ): Reiterate 4 STARS (accumulate)
Analyst: Ari Bensinger
Despite troubles in Globalstar investment. To help fund operations, struggling satellite phone carrier Globalstar (GSTRF) announced indefinite suspension of principal and interest payments on all funded debt. GSTRF believes suspension will conserve $400 mln. cash for 2001, enough to fund operations into 2002. At end of 2000, GSTRF had $195 mln. cash. QCOM expects to reserve significant portion of GSTRF assets (approximately $618 mln. exposure) and incur slight negative impact to Q1 earnings. QCOM remains comfortable with $0.28 mean estimate for Q1.
Parker-Hannifin (PH ): Downgrade to 3 STARS (hold) from 4 STARS (accumulate)
Analyst: Stewart Scharf
FY Q2 EPS of $0.68 matches year ago, but bit below consensus on more shares and late '00 shipment delays. co. says sales and earnings were ahead of its projections until mid-Dec. With slowing domestic industrial order trends and ongoing weak forex, we expect softer EPS growth for 2nd half FY 01 (June). and PH plans further realignment charges. See rebound continuing in aerospace, int'l industrial segments. But cutting our FY 01 est. by $0.25 to $3.40, FY 02 by $0.20 to $3.90. Stock now well off Oct. lows, view as fairly valued.
Parametric Technology (PMTC ): Reiterate 3 STARS (hold)
Analyst: Jonathan Rudy
Posts FY Q1 EPS of $0.07 vs. $0.06, before amortization, above estimates. Revenues fell 2%, including 3% drop in license sales. However, revenue growth for Windchill business unit was strong at 32%. Overall, we anticipate mid-single digit revenue growth in FY 01 (Sep.), driven by Windchill products. Raising our FY 01 operating EPS estimate to $0.45, from $0.40. Despite lower share price after sell-off in '00, and more reasonable EPS expectations, would not add to positions at 33 times FY 01 estimate.
Wells Fargo (WFC ): Reiterate 3 STARS (hold)
Analyst: Stephen Biggar
Posts Q4 EPS of $0.65 vs. $0.59, in line. Impressed with healthy lending volume and better interest margin comparison. Offsets included sharp drop in venture capital gains and jump in expenses related to acquisition integration. Credit quality deteriorated somewhat, in line with recent industry trends; expect continued modest weakening in '01 as economy slows. Keeping our '01 EPS estimate at $2.90. Shares deserve premium based on growth rate, superior ROE, ROA levels. But view as fairly valued at 17 times estimate.
H.B. Fuller (FULL ): Reiterate 3 STARS (hold)
Analyst: Richard O'Reilly
FY Q4 EPS $1.01 in line with expectations, vs. $1.34 before $0.32 special charge. Attributes decline to negative impact of rising raw material costs and weakness in euro. Continues inability to increase selling prices fast enough to offset higher material costs. Sales rose only 1.1% as contribution from one extra week in period was offset by adverse currency rates. Full FY 00 (Nov.) EPS of $3.47, vs. $4.06 before special items. FULL notes that demand in December was lower than in '99. Cutting our EPS est. for FY 01 to $3.50 from $4.00.
Southwest Airlines (LUV ): Upgrade to 4 STARS (accumulate) from 1 STARS (sell)
Analyst: Richard Stice
Posts Q4 EPS $0.29 vs. $0.18. $0.03 above our estimate, $0.01 above Street. Results impressive considering difficult Q4 environment for airlines. LUV benefited from strong demand, higher yields, modest fare increases and fuel hedging program. Fuel hedging resulted in Q4 savings of $64.1 million. No major labor issues on horizon. Raising our '01 EPS estimate by $0.07, to $1.37. With stronger balance sheet and wider margins than peers, expect shares to outperform.
Hughes Electronics (GMH ): Upgrade to 4 STARS (accumulate) from 3 STARS (hold)
Analyst: Howard Choe
Q4 EBITDA $154 mln. vs. year-ago EBITDA loss -$174 mln. stronger than expected, mainly on effect of lower revenue adjustments related to affiliates, and on lower SG&A costs. Demand for DirectTV services strong in U.S.. GMH at yearend had sizable backlog of 110,000 because of inclement weather.. Impressed by SG&A containment despite heavy promos for free installations. Catalysts for stock are healthy subscriber adds, renewed interest in GMH as acquisition target, defensive nature of stock and enhanced 2-way internet services.
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