Cisco Downgraded to Accumulate

The highflier, suffering from weak tech spending by customers, missed the Street's estimates. Also featured: PacifiCare and Humana

Cisco Systems (IBM ) Downgraded to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Megan Graham-Hackett

The network-solutions provider posted Q2 operational EPS of $0.18 vs. $0.12, below the Street's mean and below our estimate of $0.19, while revenue of $6.75 billion -- up 55% -- was below our $7.1 billion estimate. Cisco cited weak alternative U.S. service provider spending, but says enterprise is holding up well. The company views weak spending as a second-quarter event. Cisco sees Q3 revenues flat to down vs. Q2, in line with our estimates, but Q4 also could be flat. We are trimming our estimate by $0.09 to $0.70. With shares trading at 41 times our calendar 2001 estimate of $0.81, our more cautious near-term stance is warranted. Long term, we like Cisco as the company is poised to take share as recovery returns.

PacifiCare (PHSY ): Maintain 3 STARS (hold)

Analyst: John Massey

The healthcare provider posted Q4 EPS of $0.52 before one-time items vs. $1.59, above our estimates and above the Street's estimate. The company benefited from selling, general and administrative spending cuts and a lower share count, which added $0.09. Pacificare's premium revenue rose 15% on 8% commercial rate hikes and on the Harris acquisition. The company's blended medical loss ratio was 89.3%, vs. 84.7%, due to higher than expected medical cost trends. Its SG&A ratio was 10.3% vs. 11.6%, which reflects lower incentive compensation. We see 11%-12% commercial rate hikes in 2001. Pacificare plans to broaden its plan offering with PPO plans and Medicare supplement plans in 2002. Despite shares trading at only 10 times our 2001 EPS estimate of $2.95, execution risks loom.

Humana (HUM ): Maintain 3 STARS (hold)

Analyst: John Massey

The company posted Q4 EPS of $0.16 vs. $0.15, a penny better than our estimate. A lower tax rate added $0.03 to the current quarter. Humana's premium revenue fell slightly, due to 17.4% lower commercial enrollment from its exit from certain markets, and the sale of some operations. But the company's commercial premium yield rose 13.9%. Medicare yield was up 6.7%, but enrollment was off 3.7%. The medical loss ratio improved to 83.7% from 84.2% in Q3, aided by market exits. The admin ratio rose to 15.9% vs. 15.5%, reflecting higher technology and infrastructure spending. We see 3%-4% member growth and 8%-9% cost trends in 2001. Humana, trading at 17.5 times our 2001 EPS estimate of $0.70, is fairly valued in light of execution risks.

General Motors (GM ): Maintain 2 STARS (avoid)

Analyst: Ephraim Levy

GM is reportedly in discussions with News Corp. on a possible merger of GM's Hughes Electronics subsidiary, operator of satellite broadcaster DirectTV. GM has been looking to further monetize its ownership in Hughes and would likely only commit to agreement under which it receives a multibillion cash infusion to shore up its balance sheet. Any deal would also need to be structured to be tax free, as well as to resolve certain other issues. We believe GM is looking as well at other potential buyers.

Korn/Ferry International (KFY ): Maintain 4 STARS (accumulate)

Analyst: Mark Basham

A slowdown in Korn/Ferry's executive search unit worsened as fiscal Q3 progressed. Korn/Ferry is cutting costs and reducing headcount 10% across all business units. But we do not think that the bottom of the current downturn will occur until this spring. We see revenue growth in 2H of fiscal 2001 (April) slowing to 5.5%, with Q4 revenue down, year over year. We are trimming our fiscal 2001 (April) EPS estimate by 5%, from $0.90 to $0.81, and fiscal 2002 by 20%, from $1.30 to $1.04. A price decline Wednesday should be a good opportunity for investors to establish its long-term positions.

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