Keane Cut to Avoid

Also: opinions on Amphenol and Novellus

Keane (KEA ): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Mark Basham

Businesses are deferring purchases of hardware and software, which will almost certainly affect demand for services. S&P is hearing repeatedly that mostly those projects with a quick payoff are getting the green light. S&P thinks Keane is a tighter-run ship than most, but is not unaffected. S&P is cutting its 2001 cash EPS estimate from $0.55 to $0.50, about 20% below consensus. Investors are struggling with tech-stock valuations as short-term weakness overshadows the key role that technology companies will continue to play in the long-term growth of the U.S. economy.

Amphenol (APH ): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Michael Jaffe

Amphenol sees Q1 EPS of $0.66-$0.68 and thinks its full-year EPS will fall 10%-15% below consensus, to $2.70-$2.90. Amphenol now sees flat 2001 sales as a slower economy softens orders for the coaxial cable used in infrastructure applications, but sales remain strong for connector and interconnect product sales to the communication, industrial and aerospace markets. Cost cuts and deleveraging should aid margins. S&P is cutting its 2001 estimate to $2.80 from $3.25. Amphenol is undervalued at only 13 times S&P's 2001 forecast -- at the low end of the traditional multiple -- but the current business setting tempers our enthusiasm.

Novellus Systems (NVLS ): Maintains 2 STARS (avoid)

Analyst: Thomas Smith

Novellus' mid-quarter update lowers current quarter revenue expectations as bookings slow further. Reports deteriorating earnings visibility. Industry-wide semiconductor equipment sales could be down by 20% in 2001. The company's strong position in tools for next-generation copper interconnect and 300 millimeter wafer markets helps keep up sales for technology upgrades even as sales for capacity expansion reasons dry up. Although Novellus competes well in its field, it still suffers along with the industry. S&P is reviewing its estimates with cuts in mind.

Gap (GPS ): Reiterate 3 STARS (hold)

Analyst: Karen Sack

Gap posted fiscal Q4 EPS in line with expectations, down 34% to $0.31. Same-store sales were lower in all divisions. Weak traffic and high markdowns eroded profitability. Fiscal 2001 (Jan.) EPS was $1.00, down 26% from the prior year. Gap sees fiscal Q1 EPS down significantly from last year, and sees weak sales continuing in Q2. S&P is lowering its fiscal 2002 estimate by $0.10 to $1.10. Gap is slowing expansion to a 17%-20% increase in square footage in fiscal 2002 and a 15% increase in subsequent years vs. an overly aggressive 31% rise in fiscal 2001. With the economy slowing and weak first half sales expected, S&P recommends that investors remain on the sidelines.

Oracle (ORCL ): Maintains 4 STARS (accumulate)

Analyst: Jonathan Rudy

Oracle sees fiscal Q3 EPS of $0.10 -- $0.02 below estimates -- and sees revenues of $2.67 billion, below the $2.85 billion S&P expected. The slowdown in the U.S. economy has led to a delay in IT spending. Oracle's database revenue is much lower than expected. However, application revenue is up 50%. Also, operating margin rose to 33% from 31%. S&P is lowering its fiscal 2001 (May) EPS estimate to $0.46 from $0.49, and sees fiscal 2002 at $0.52. With improved profitability, a return on equity of around 40%, and 15-20% long-term growth, S&P would still accumulate shares of the industry leader.

Integrated Device Technology (IDTI ): Maintains 5 STARS (buy)

Analyst: Thomas Smith

The company's mid-quarter update acknowledges that weakening communication-chip industry conditions are likely to tip revenue in Q4 fiscal 2001 (Mar.) down 20% sequentially. This is similar to the experiences of other peer companies. Integrated Device's inventory will clog channels into Q1 fiscal 2002 (Mar.). S&P thinks growth can resume by mid-2001 S&P is resetting its fiscal 2001 EPS estimates to $2.74 from $3.07, and cutting fiscal 2002 estimates to $2.80 from $3.50. The company is controlling costs well. Ample cash permits share buybacks and there is consideration of acquisitions. Shares are undervalued at 13 times the $2.47 calendar 2001 EPS estimate, with 28% long-term growth potential.

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