Upgrading AOL Time Warner to 'Accumulate'

AOL Time Warner (AOL ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Scott Kessler

The multimedia provider posted Q1 cash EPS $0.23 vs. $0.19, $0.02 better than the Street's consensus. Revenues rose 9.2% on good performances from AOL, cable and film units. EBIDTA rose a solid 20%, reflecting the strong subscription-based model, streamlined operations and leveraging of assets. Importantly, AOL's tone about the advertising and commerce (23% of revenues) market is relatively positive. With 133 million subscriptions and valuable assets, and a price-to-earnings multiple of 1.5 times EBITDA growth, S&P likes AOL even amid economic uncertainty.

Pfizer (PFE ): Downgrades to 3 STARS (hold) from 5 STARS (buy)

Analyst: Herman Saftlas.

Pfizer's Q1 EPS climbed 32% to $0.33, $0.02 above Street consensus, on a 6.8% rise in revenues. Drug sales climbed 9.2%, largely on strength in the Lipitor cholestrol drug (+31%), boosted by the recent launch in Japan. Sales of animal health and consumer products were lower. The Q1 EPS gain mainly was derived from merger-related cost savings, which do not last indefinitely. Lipitor also is facing potential competition from AstraZeneca's Crestor. The 25%-plus EPS growth may be unsustainable over the long-term. Shares also are valued at a 23% premium to big-pharmaceutical group shares.

Delta Air Lines (DAL ): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Richard Stice

Before unusual items, Delta posted a Q1 loss of $1.02 vs. EPS of $1.27, below lowered guidance. The results were hurt by the slowing economy and labor issues. A strike at Comair unit reduced the Q1 revenue by $24 million, and lowered the EPS by $0.12. Delta and the pilots' union still are far apart on Delta's salary and wage proposal. Fuel hedging saved $106 million in Q1. The airline sees a Q2 decline in U.S. bookings. S&P is lowering its 2001 EPS estimate by $1.65 to $2.70. Given weak travel demand and ongoing labor concerns, S&P expects the stock to underperform the broader market.

J.P. Morgan Chase (JPM ): Maintains 5 STARS (buy)

Analyst: Stephen Biggar

J.P. Morgan Chase posted Q1 EPS of $0.70 vs. $1.01, ahead of expectations. The decline largely reflects unrealized losses in its private equity portfolio and weak underwriting activity, though some equity-sensitive lines held up well, including trading revenues. The company continues to gain market share in M&A advisory. Merger integration appears on track, with efforts showing in the company's solid expense base improvement. Extensive geographic and product diversity should help maintain EPS momentum relative to peers. S&P estimates 2002 EPS of $3.60.

Hewlett-Packard (HWP ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Hewlett-Packard preannounced a Q2 EPS shortfall and sees EPS of $0.13-$0.17 vs. the Street's mean of $0.35-$0.37 and S&P's $0.36 estimate. The shortfall includes $150 million in one-time inventory and capacity writedowns. The company sees revenues down 2-4% vs. Q1 and year over year, in line with S&P's estimate. H-P cited weak U.S. consumer tech spending spreading abroad, especially to Europe. S&P will update after a morning conference call.

Intel (INTC ): Maintains 3 STARS (hold)

Analyst: Megan Graham-Hackett

Intel posted Q1 EPS of $0.16 vs. $ 0.36, above the Street's reduced mean and S&P's estimate of $0.15. In EPS preannouncement, Intel saw revenue down 25% vs. Q4, but actual came in at $6.7 billion, down 23%. Gross margin was 51.7%, or 70 basis points above S&P's estimate. More importantly, the company says its microprocessor business seems to have stabilized. Intel sees Q2 revenue at $6.2 billion to $6.8 billion vs. S&P's $6.8 billion estimate, and sees gross margin near 49% on weak communication chips and price pressures. S&P is cutting its 2001 estimate $0.07 to $0.63, and views the company's comments as an important psychological positive for PCs and semis. Still, Intel is trading at 45 times S&P's 2001 estimate, warranting a hold on the shares.

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