Upgrading AOL Time Warner

Also: analysts' opinions on Anheuser Busch, Gemstar and other stocks

AOL Time Warner: Upgrades to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Scott Kessler

While many Internet/media companies have struggled mightily in the dot-com crash and economic slowdown, AOL didn't preannounce, and posted solid Q1 results. The significant value was contributed by 133 million subscriptions generating annuity-like revenue, and by leading and diverse media assets. The rest of 2001 looks great with broadband AOL, ongoing digital-cable ramp, blockbuster movies, and high-profile music CDs. Also see multi-platform marketing gaining momentum.. At 20 times the 2001 EBITDA of $11 billion, the blue-chip stock trades at a discount to the long-term 24% EBITDA growth rate.

Anheuser-Busch (BUD ): Reiterates 5 STARS (buy)

Analyst: Richard Joy

Business fundamentals are strong and earnings visibility is good for 2001. Sales to retailers are up a strong 2.7% so far in Q2, providing good momentum going into the key summer season. Price hikes are sticking, and S&P sees a solid 2.2%-2.7% gain in revenue per barrel in 2001. Strong profit growth is expected for packaging and entertainment operations. Equity income should gain 20% to $240 million. Given the company's dominant market position, growing free cash flow, brand momentum and defensive appeal, shares are attractive at 22 times S&P's $1.90 EPS estimate for 2001.

Wal-Mart (WMT ): Maintains 4 STARS (accumulate)

Analyst: Karen Sack

Wal-Mart posted Q1 EPS in line at $0.31 vs. $0.30. A strong 15% rise in operating profit at Sam's wholesale clubs segment and a 44% rise in the international division were offset by just an 0.8% rise in operating profit at Wal-Mart discount stores and supercenters. Wal-Mart sees weakness in consumer spending continuing in Q2 but improvement in same-store sales in the second half, aided by easy comparisons. S&P sees another year of growth in fiscal 2002 (Jan.), with over 330 new units in domestic and international operations. S&P is maintaining its estimate of a 15% rise in fiscal 2002's EPS to $1.56.

Home Depot (HD ): Maintains 5 STARS (buy)

Analyst: Maureen Carini

The home-improvements company posted better-than-expected Q1 EPS of $0.27 vs. $0.27. Same-store sales slid 3% on poor weather and lower commodity prices. Although operating margins were hurt by lower volume, higher payroll costs and rising energy prices, S&P remains pleased with Home Depot's ability to improve its gross margins and leverage non-selling general and administrative costs. S&P also is encouraged by a further rise in inventory turns and still is optimistic about Home Depot's second-half pickup, which is driven by interest rate cuts, firming lumber prices and ongoing cost savings. S&P is keeping its fiscal 2002 (Jan.) EPS estimate of $1.25.

Hain Celestial Group (HAIN ): Reiterates 4 STARS (accumulate)

Analyst: Richard Joy

The specialty and snack food company posted March quarter EPS before special items of $0.17 vs. $0.28, $0.10 below expectations. The results were hurt by retail inventory reductions ($0.12 per share) and higher energy costs ($0.01). Given strong current consumption trends for core growth brands, S&P believes the worst is past. New products and increased grocery distribution should lead to 12%-15% volume and 20% EPS growth for fiscal 2002 (June). S&P is reducing its fiscal 2001 EPS estimate by $0.08 to $0.95 and sees fiscal 2002 at $1.15. Given Hain's strong balance sheet and takeover potential, the shares are attractive at 20 times S&P's fiscal 2002 estimate.

Longs Drug Stores (LDG ): Reiterates 2 STARS (avoid)

Analyst: Phillip Seligman

The company posted fiscal Q1 EPS of $0.34 vs. $0.31, excluding one-time items, in line with expectations. Sales were up 8%, aided by higher pharmacy same-store sales, which were up 14.3% compared to the prior year. Operating margin was down 19 basis points, as high utility costs and a greater proportion of pharmacy sales outweighed lower selling, general and administrative costs as a percentage of sales. Front-end comparisons were up only 1.1%; better than Q4, but could worsen with rising competition. Rivals are raising pharmacist pay packages, which S&P believes the company must match or beat. S&P is cutting the fiscal 2001 (Jan.) estimate $0.06 to $1.60. S&P also is trimming the fiscal 2002 estimate $0.07 to $1.75. The supply-chain fix is under way, but Longs' still has a way to go to compete better.

Gemstar-TV Guide (GMST ): Maintains 5 STARS (buy)

Analyst: Howard Choe

The electronics products company posted a Q1 loss $0.30 vs. $0.11 EPS, a penny better than S&P's estimate. Revenue growth for technology/licensing and interactive platform sectors were stronger than S&P expected. EBITDA is up 23%, and margins are up nearly 700 basis points. The company has great potential for international growth: With News Corp's increased stake in Gemstar, S&P expects Gemstar's interactive programming guides (IPGs) to soon be deployed in News' satellites globally. Budding European cable systems also are a target. S&P expects Gemstar to hammer out a guide deal with AOL Time Warner. With shares trading at 35 times S&P's EBITDA estimate and at a 45% discount to the company's intrinsic value, S&P thinks it's a great time to buy the interactive TV gateway leader.

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