Still Hold Alcatel and Lucent

Also: analysts' opinions on Gap Inc. and Liberty Media

Alcatel (ALA ) and Lucent Technologies (LU ): Maintains 3 STARS (hold)

Analyst: Ari Bensinger

According to a press report, Alcatel is in preliminary talks to buy struggling Lucent for over $40 billion, some 20% above the closing share price on May 17. Talks reportedly are at a critical stage; a decision whether to move to formal negotiations is expected within weeks. Even if talks fall through, Alcatel would still be the front-running bidder for Lucent's optical fiber unit. The deal would enhance Alcatel's U.S. footprint, have significant cost synergies and give Alcatel access to Lucent's large, prominent customer base. But Alcatel has its own problems in a weak environment and the integration of Lucent would add more uncertainty.

Gap Inc.: Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Maureen Carini

The retailer posted $0.13 vs. $0.17 April quarter EPS, a penny better than expected. Same-store sales fell 7% on weakness across all business units. Margins were hurt by lower volume and heavier markdowns. Although April comparisons were encouraging, S&P doesn't expect much improvement in sales trends until at least Q4. S&P is cutting its fiscal 2002 (Jan.) EPS estimate by $0.10 to $1.00. The company now expects to slow expansion to a 17% addition to square footage vs. an overly aggressive 31% rise in fiscal 2001. With no immediate catalyst for an earnings rebound, S&P sees little upside at 34 times the new estimate.

AT&T's Liberty Media Class A (LMG.A ): Adding with 5 STARS (buy)

Analyst: Thomas Graves

S&P expects benefits from the prospect of Liberty Media tracking stock to become a separate publicly-owned company this summer. Its large portfolio of media holdings contains some of S&P's favorites, including AOL Time Warner and USA Networks. Also, S&P expects the stock's privately owned assets to rise in value, helped by favorable results from TV programming companies Discovery Communications, Starz Encore, and QVC. S&P views Liberty Media stock as an attractive way to benefit from the savvy of Liberty Chairman John Malone.

Palm Inc. (PALM ): Maintains 3 STARS (hold)

Analyst: Megan Graham-Hackett

Palm preannounced a Q4 shortfall. The company sees revenues of $140-$160 million vs. prior estimate of $300-$315 million, on an operating loss of $170-$190 million vs. the prior estimate of a $80-$85 million loss. Palm cited the impact of lower volumes and aggressive pricing due to the delayed ramp of its new m500. But with U.S. availability of m500, recent sales are up sharply. The m500 rollout to major geographies should boost revenues and the average selling price. S&P now sees a fiscal 2001 (May) loss of $0.05 vs. the prior estimate of $0.03 EPS and a fiscal 2002 loss of $0.21. SS&P expects Palm to announce plans to raise cash. Given the company's strong brand franchise, long-term investors should hold.

Dell Computer (DELL ): Reiterates 3 STARS (hold)

Analyst: Megan Graham Hackett

Dell posted April quarter EPS of $0.17 vs. $0.19, in line with the Street mean, and S&P estimate of $0.17. Revenue was up 10% to $8 billion, also in line. Gross margin of 18% vs. 20.5% was just below S&P's estimate. Enterprise revenue was up 17% as units surged 43%, and U.S. consumer units were up 43%. Cash flow from operations grew to an impressive $822 million. However, the company sees Q2 revenues down 3%-5% given the weakness in consumer and corporate market, and also sees EPS of $0.15- $0.17, vs. S&P's $0.18 estimate. S&P is trimming its fiscal 2002 (Jan.) estimate to $0.70 from $0.78 on lower revenue growth. At 37 times, shares are fairly valued given Dell's strong competitive position.

Agilent Technologies (A ): Maintains 3 STARS (hold)

Analyst: Megan Graham Hackett

Agilent posted Q2 EPS of $0.26, before a $0.15 inventory writedown, vs. $0.35, below the reduced Street mean of $0.27. The results met S&P's estimate. Revenues were up 10% to $2.7 billion, above S&P's estimate. The biggest news was a 41% slide in orders to $1.8 billion on weakness in Test & Measurement (down 47%) and semis (down 68%), and included $500M in cancellations. The company sees Q3 revenues of less than $2 billion, and sees a loss of $0.20-$0.30, including a $0.05 restructuring charge. While Agilent sees the industry at the bottom, with EPS visibility still low, S&P would not add to positions.

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