Applied Materials Cut to Avoid

S&P thinks strikingly lower chip sales leaves room for a price slide. Also: opinions on Conseco and Whole Foods

Applied Materials (AMAT ): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Thomas Smith

The chipmaker posted Q1 fiscal 2001 (Oct.) EPS of $0.66 from operations vs. $0.39, below a $0.70 consensus. Sales were up 59% but down 6% quarter over quarter. Gross margin narrowed to 290 basis points. Orders are down a stunning 33% from Q4 fiscal 2001, illustrating a rapid drop in its chip equipment business. The book-to-bill for the industry leader fell to 0.9. The company offered a gloomy outlook, and sees a 20% drop in industry-wide 2001 wafer equipment sales. S&P is cutting our $2.50 fiscal 2001 estimate to $1.80. Valuation is moderate at 23 times our fiscal 2001 estimate versus a 25% long-term growth rate, but S&P still sees room for a price dip.

Conseco (CNC ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Catherine Seifert

The company published reports highlighting allegations in an upcoming lawsuit filed in early 2000 (and recently amended) claiming former Conseco officials, including ousted CEO Steve Hilbert, falsified loan records in attempt to lower its loan delinquency rate, which would boost the value of securities backed by these loans. New CEO Gary Wendt noted the lawsuit is "one of the last legacy issues facing the new Conseco." Nevertheless, shares are likely to be average performers until the dust settles.

Whole Foods Market (WFMI ): Downgrades to 3 STARS (hold) from 5 STARS (buy)

Analyst: Maureen Carini

The grocery-store chain's Q1 EPS of $0.54 vs. $0.50 was a bit lower than expected. Same store sales rose 7.3%, at the lower end of the projected 7% to 9% range. Gross margin expansion was limited by soaring utility costs, while selling, general and administrative costs were higher due to an ongoing sales mix shift to higher margin service departments. For fiscal 2001 (Sept.), S&P sees sales up 15% to 20% on a 6% rise in same store sales. S&P is cutting its fiscal 2001 EPS $0.05 to $2.30. Although S&P remains comfortable with the company's long-term growth potential, S&P believes its near-term outlook is clouded by a slower economy and increased new store costs.

BP Amoco (BP ): Maintains 3 STARS (hold)

Analyst: Tina Vital

The oil-services firm's Q4 proforma earning/ADS of $1.10 vs. $0.66 was $0.04 above consensus on higher oil and gas prices and ARCO contributions. BP's adjusted income for exploration and production was up 79%; gas and power rose 25%; refining and marketing rose 211%; chemicals fell 47%. Production was down 4% (excluding acquisitions and divestments). BP's 2001 E&P spending was cut to $12.5 billion from $13-$14 billion. S&P sees 2001 EPS at $3.52, and 2002 EPS at $3.11. Despite 25% adjusted ROCE, shares are trading at a discount to peers, with production lagging. S&P recommends hold.

Clear Channel (CCU ): Maintains 3 STARS (hold)

Analyst: Howard Choe

The company's Q4 after-tax cash flow (ATCF) per share of $0.77 vs. $0.68 was $0.02 above estimates. Pro forma revenue was up 5%, with radio and outdoor up 6% and 10%, respectively. Solid growth reflected advertisers' affinity to these ad mediums in a slowing economy. Pro forma EBITA growth of 14% reflected tight cost controls and benefits of AMFM integration. While Clear Channel should weather the storm better than peers because of its diversified client base, the industry is hurting so far in Q1. A murky economic outlook restrains further enthusiasm for stock. S&P thinks the company is fairly valued at 18 times our 2001 ATCF estimate of $3.16.

Viacom Class B (VIA.B ): Maintains 3 STARS (hold)

Analyst: Thomas Graves

Excluding certain one-time items, Q4 EPS looks close to our $0.02 EPS estimate. Including a reduced tax rate projection, S&P is raising its 2001 EPS estimate to $0.30 from $0.15. With tough comparisons in the first half, the company's expectation of about $6.2B EBITDA in 2001 looks aggressive. But even if Viacom falls modestly short, S&P still expects a strong generation of free cash flow. The stock is at estimated enterprise value of about 17 times our 2001 EBITDA projection. S&P views this -- plus the stock, which is at roughly 17 times our estimated free-after-tax cash flow -- as adequate valuations.

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