S&P Steers Ford up to 'Hold'

Ford (F ): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Efraim Levy

Excluding an accounting change and other adjustments, Ford posted Q1 EPS from continuing operations of $0.60 vs. $0.90, above the mean. Sales and margins were lower, reflecting U.S. volume decline. But restructuring contributed to European income gains and finance income was stable. Industry volume in the first quarter was better than expected, but the balance of the year remains in doubt. Despite Ford's climb Wednesday on news of the Fed's rate cut, history suggests improved performance in six to 12 months from now for cyclicals. With a 3.9% dividend yield, S&P thinks its okay to hold Ford for total return.

Raytheon : Maintains 3 STARS (hold)

Analyst: Robert Friedman

Raytheon posted a Q1 loss from a $325 million charge from the 2000 sale of its troubled construction unit, which still is giving the company big headaches. But operating EPS was $0.28 vs. $0.24. In general, there's little that is stellar about Raytheon. The company mostly caters to mature defense markets; is run by uninspired management; posts erratic EPS, low ROE, weak cash flows; and has high debt levels. However, intrinsic value calculations indicate Raytheon is fairly valued. The potential for $450 million of added 2001 charges already are in the stock price.

Southwest Airlines (LUV ): Maintains 4 STARS (accumulate)

Analyst: Richard Stice

The air carrier posted Q1 EPS of $0.15 vs. $0.12, before a charge, in line with S&P's estimate. The results are impressive in a difficult Q1 environment for airlines. The company benefited from strong demand, higher yields and fuel hedging. Fuel needs are 80%-hedged for the rest of 2001 at $22 per barrel. Commission costs declined as Internet bookings rose 57%. No major labor issues are on the horizon. S&P is maintaining its 2001 EPS estimate of $0.91. With a stronger balance sheet and higher margins than its peers, S&P expects the stock to outperform.

Apple Computer (AAPL ): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Megan Graham-Hackett

Apple posted Q2 operating EPS of $0.11 vs. the Street's mean and S&P's estimate of a penny. Revenues were $1.43 billion, down 26%, but above S&P's $1.3 billion estimate. Gross margin of 26.9% vs. 28.2% also was above S&P's estimate but higher expenses caused an operating loss. Units fell 28%: iMac was down 37%, iBook was down 52%, G4 was down 29% but PowerBook was up 34%. Despite a Q2 EPS surprise, S&P is keeping the fiscal 2001 (Sept.) $0.34 loss estimate as the company lowered its guidance. Apple now sees fiscal 2001 revenue of $5.6-$5.8 billion vs. the prior $6 billion estimate. Still, with potentially strong educational sales season next quarter, Apple is worth holding.

International Business Machines (IBM ): Upgrading to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Megan Graham Hackett

IBM posted Q1 EPS $0.98 vs. $0.83, in line with the Street's mean, and above s&P's $0.95 estimate. Revenues were up 9% to $21 billion, higher than S&P's 5% estimate. Hardware revenues rose by a surprising 11% -- $500 million above S&P's estimate on server and storage strength. Services revenues were up 11%, and e-business was up 40%. New Q4 signings were $10 billion and backlog was $87 billion. Software sales were flat, but IBM saw strength in Websphere (up 53%) and database sales. IBM is comfortable with the 2001 Street estimate and is raising its 2001 estimate to $4.80. At 23.5 times the estimate and strong EPS momentum as the company continues to execute well, IBM is undervalued.

RJ Reynolds (RJR ): Reiterates 3 STARS (hold)

Analyst: Richard Joy

The tobacco manufacturer posted Q1 EPS of $0.98 vs. $0.76, a penny better than expected. Net sales rose 2.4%, as higher pricing outweighed a 6.6% volume decline. Volumes were skewed by wholesaler inventory reductions. Retail consumption only declined 2%-3%, in line with industry trends. RJ Reynolds still is sitting on $2.5 billion in cash and may pursue acquisitions in addition to a share repurchase and debt reduction. S&P is keeping the 2001 EPS estimate at $4.61, up 16%. At 13 times S&P's 2001 EPS estimate, shares are worth holding given the company's strong balance sheet, defensive appeal and improving tobacco litigation environment.

Office Depot (ODP ): Maintains 3 STARS (hold)

Analyst: Maureen Carini

The office-goods supplier posted Q1 EPS of $0.19 vs. $0.32, in line with expectations. Revenues slid 2% as 10% lower retail same-store sales were mostly offset by strong international and e-commerce growth. Retail gross margin was hurt by price cuts to eliminate discontinued goods. But progress was made in operating-cost management. International sales continued to post strong gains with operating profits up 27%. Business service group profits rose 2%. S&P is reducing its 2001 EPS estimate by $0.05 to $0.75, amid the slow retail climate. But Office Depot's healthy inventory position and focus on cost efficiencies should help the company weather the downturn.

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