Setback for Sepracor

The drug developer's shares are suffering after the drug it licensed to Schering-Plough encountered FDA delays. Also: opinions on JDS Uniphase and PMC-Sierra, plus others

Sepracor (SEPR ) Downgrades from 4 STARS (accumulate) to 3 STARS (hold)

Analyst: Howard Saftlas

Shares of Sepracor are down today on likely delays in the launch of desloratadine, which is licensed to Schering-Plough. The compound is an active ingredient in Schering's 2nd generation Claritin allergy drug (to be sold under the Clarinex name). Delays are from FDA issues with Schering's plants in New Jersey and Puerto Rico, which is likely to trim Sepracor's royalty growth and increase its loss this year. Disappointment follows in a decision last fall by Eli Lilly to end R&D work on Sepracor's advanced Prozac. But Sepracor has a strong pipeline of enhanced versions of many other popular drugs, though the payoff is not likely to arrive before 2004-2005.

JDS Uniphase (JDSU ): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Ari Bensinger

Recent industry announcements have confirmed a difficult near-term outlook for the telecom capital spending environment. Visibility is extremely low, as capital availability issues lead service providers to delay orders. S&P believes other system makers besides Nortel Network are feeling weakness. While JDS is reallocating orders to new customers, Nortel (over 10% customer) weakness will be difficult to overcome. S&P prudently lowered its fiscal 2001 (June) EPS estimate to $0.70 from $0.74, and S&P would take more a conservative stance until visibility improves. PMC-Sierra (PMCS ) and Texas Instruments (TXN ): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Thomas Smith

These two semiconductor makers both announced their own earnings woes a few weeks ago, citing inventory buildups and slowdowns in customers' orders. Shares have since moved down as customers and peers made announcements confirming weakness in this industry. With a swirl of bad news more fully reflected in the price of stocks, S&P sees a more balanced risk/reward. Although serving different segments of chip sector, these two companies have the potential to perform better if the economy improves as expected by late 2001.

Dell Computer (DELL ): Maintains 3 STARS (hold)

Analyst: Megan Graham Hackett

Dell posted Q4 EPS of $0.18 vs. $0.15, below S&P's $0.19 estimates due to a larger number of shares outstanding. Revenues are ahead of S&P's estimates at $8.7 billion, up 28%, offset by a gross margin of 18% vs. 19.2% and S&P's 18.7% estimate as Dell pursued market share. Unit shipments surged 43%, while enterprise revenues rose 42%. U.S. consumer sales were up 46% and cash flow from operations was $1.2 billion while ROIC rose 325%. Dell sees Q1 revenues down 8% vs. Q4, and sees EPS of $0.17. S&P is cutting its fiscal 2002 (Jan.) estimate to $0.81 from $0.98 on lower gross margin guidance. At 29 times S&P's calendar 2001 estimate, the shares are fairly valued given Dell's strong competitive position. (PCLN ): Maintains 3 STARS (hold)

Analyst: Scott Kessler

The online bidding site posted a loss excluding one-time charges of $0.15 (pro-forma) vs. $0.06, much worse than expected. Revenues were up 35%, but fell 33% from Q2 due to seasonal weakness, a rash of negative news on customer service, the closure of its gas and groceries licensee and a sharp decline in stock. Also, a $66.8 million restructuring charge reflected the company's exit from certain businesses and layoffs. Despite's poor recent performance and a questionable operating model, S&P kept its hold ranking on the shares based on several factors: improving business momentum, cost structure, a $50 million investment from Hutchison Whampoa, Q2 profit (pro-forma) expectations and cash/investments worth $1.02 per share.

Novell (NOVL ): Reiterates 3 STARS (hold)

Analyst: Jonathan Rudy

The network-solutions and software provider posted fiscal Q1 EPS of $0.01 vs. $0.13, excluding one-time charges, $0.01 above estimates. Revenues fell 22%, reflecting continued weakness of packaged software sales globally, especially in Europe. Novell remains in the middle of a product strategy transition, which will take some time, but S&P see this switch to a focus on emerging growth areas as a positive move. S&P believes Novell is being hurt by competitive pressures and the global economic slowdown. S&P is lowering its fiscal 2001 (Oct.) EPS estimate to $0.17 from $0.27. However, with Novell's refocused strategy and more than $2 in cash per share, its O.K. to hold.

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