Order Delays Weigh on Emulex

S&P says the fiber-optic firm's warning of postponed orders could lead to flat growth. Also: opinions on Pharmacia and Potomac Electric

Emulex (EMLX ): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: James Corridore

Emulex warned that the deferral of orders to fiscal Q4 could lead to flat sequential revenue growth for fiscal Q3. The company had guided to 15%-17% sequential growth. This change could reduce its Q3 EPS by $0.03-$0.05, leading to a full-year EPS forecast of $0.75, down from $0.85. While $0.75 EPS would represent 74% growth over fiscal 2000, Emulex's weak IT environment, order deferrals, and deceased visibility increase its risk. However, due to its leadership position in a strong industry sector, the company would use its weakness to selectively add to positions.

Pharmacia (PHA ): Maintains 3 STARS (hold)

Analyst: Herman Saftlas

The drug maker's Q4 operating EPS was up 33% to $0.32, in line with the consensus. The results were boosted by sales growth in Celebrex' antiarthritic (+55%), Xalatan for glaucoma (+23%), Camptosar anticancer (+40%), and Detrol incontinence (+21%). EPS growth also was helped by flat R&D spending and merger synergies. However, gross margins fell to 67.9%, from 68.3% due to lower agricultural margins. Q4 sales growth of 6.3% was below expectations due to negative foreign exchange and weakness in older lines. The company forecasted 20% EPS growth in 2001. We think the shares are adequately valued based on 20% premium P/E to the drug group average.

Potomac Electric Power (POM ): Maintains 3 STARS (hold)

Analyst: Justin McCann

Given the consolidation taking place in the industry, we see the agreed-to $2.2 billion (in cash and stock) acquisition of Conectiv as adding essential critical mass to Potomac's customer base. We also see Potomac's reduction of its quarterly dividend, from $0.415 to $0.25 (beginning with the June 2001 payment), as providing the financial flexibility required for expansion of the new holding company's non-regulated units, including its fast growing telecommunications businesses. We expect the acquisition, which should be accretive from the start, to close in early 2002.

Sanmina (SANM ), Solectron (SLR ) and Flextronics (FLEX ): Maintains 5 STARS (buy)

Analyst: James Corridore

Amid recent analyst downgrades of electronic manufacturing services companies, we are reiterating our belief that even in a weak economic environment, these top picks will see strong growth. Sanmina is positioned in the high end of telecom space, which should continue to see strength. Solectron's diversified customer base provides an advantage in a downturn. Flextronics should benefit from deals with Ericsson and Motorola, who are increasing their outsourcing. The long-term growth trend remains intact.

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