AIG Still Attractive after American General Deal

Also: analyst opinions on Lucent and Yahoo; plus others

American International Group (AIG ): Reiterates 4 STARS (accumulate)

Analyst: Catherine Seifert

S&P is raising its estimate of AIG's 2002 operating EPS by $0.20 to $3.45 to reflect an accretion from its proposed deal to acquire American General. The $23 billion deal ($46 per share) in stock will give AIG U.S.-based life insurance and consumer finance platforms as well as a broader reach in the retirement-savings arena. The shift in AIG's pro-forma profit mix to a 50% life-insurance base tempers S&P's outlook, given AIG's valuation. But S&P still views shares as modestly undervalued, and has set a 12-month price target of $85.

Lucent Technology (LU ): Maintains 3 STARS (hold)

Analyst: Ari Bensinger

The company strongly denied Chapter 11 bankruptcy rumors, and believes its new $6.5 billion credit facility provides financial flexibility to execute a turnaround plan. S&P would point out that the credit facility contains financial convents, such as that Lucent must have a minimum net worth of $23 billion, and that its cumulative EBITDA must be better than negative $2.35 billion for fiscal 2001 (Sept.). Also, Lucent must have a minimum 1.75 ratio of current assets to specified secured debt and other obligations. S&P will wait for Lucent's upcoming Q2 balance sheet to assess the outlook for compliance.

Yahoo (YHOO ): Maintains 3 STARS (hold)

Analyst: Scott Kessler

The Internet portal company announced an enterprise portal partnership with German software giant SAP. The companies will work together to develop a joint enterprise portal and market it directly and via other sales channels. This is major step for Yahoo as its Corporate Yahoo portal business gains traction. The extension of corporate offerings with SAP's back-office capabilities is likely to result in greater market penetration and more assured success. As Yahoo aims to diversify its revenue mix away from advertising, S&P believes the corporate portal segment is increasingly important. But even so, Yahoo is still very reliant on the tough advertising market.

Tenet Healthcare (THC ): Reiterates 5 STARS (buy)

Analyst: Robert Gold

The firm posted fiscal 2001 (Feb.) Q3 EPS of $0.60 vs. $0.48, three cents above S&P's estimate, despite the weak flu season. Overall, admits are down 0.3% on hospital sales. Same-facility admits are up 0.7% as a 12% fall in flu-related admits was offset by gains in cardiology, orthopedics and neurology. Same-facility net patient revenue/admits are up 8.3% on better pricing. Cost controls pushed EBITDA to 19.0% from 17.5%. Surging cash flows allowed for more debt paydowns. The defensive stock continues to represent one of S&P's best-positioned healthcare names.

Rational Software (RATL ): Reiterates 4 STARS (accumulate)

Analyst: Jonathan Rudy

The firm cut its fiscal Q4 (Mar.) revenue and EPS guidance to $240 million-$245 million, and $0.20-$0.22 vs. consensus $253 million and $0.22. Rational also lowered its fiscal 2002 revenue and EPS guidance to $900 million-$950 million, and $0.50-$0.60. The firm set a 10% workforce cut, and a 20-million-share buyback, citing the global economic slowdown as the primary cause. S&P is placing estimates under review with a downward bias. Despite the near-term challenging economic environment for software companies, with over $5.50 per share in cash, a stock buyback of over 10% of shares, and mid-teen operating margin, Rational will emerge in a stronger position as a key provider of software infrastructure.

Sybase (SYBS ): Maintains 1 STARS (sell)

Analyst: Jonathan Rudy

The firm sees Q1 revenues of $227 million-$231 million, up a bit year over year but lower than the Street's mean. Sybase sees $0.23-$0.26 EPS vs. consensus of $0.28. The firm cited the global economic slowdown in North America as the primary cause for delayed IT spending, however, Sybase has experienced strength in Europe and Asia. S&P is placing estimates under review with a downward bias. The acquisition of software company New Era of Networks (NEON ) remains on track, but S&P still sees more disappointing news. With the acquisition and a challenging economic environment, S&P believes shares will continue to underperform.

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