Upgrading Goodyear Tire

Also: analysts' opinions on Toys 'R' Us and Lowe's Cos.

Goodyear Tire & Rubber Co. (GT ): Upgrades to 3 STARS (hold) from 1 STARS (sell)

Analyst: Efraim Levy

S&P sees Goodyear Tire, France's Groupe Michelin, and Continental AG among the potential beneficiaries as Bridgestone/Firestone Inc. says it will stop supplying tires to Ford Motor. Replacing Firestone brand tires on Ford vehicles would benefit Goodyear both from original equipment sales and profits and from increased replacement tire revenues and income, as many consumers replace worn tires with the same make as the original tires. Margins would benefit from increased capacity utilization, but the unfavorable economic environment restrains S&P's enthusiasm for Goodyear.

Toys 'R' Us (TOY ): Maintains 4 STARS (accumulate)

Analyst: William Donald

Toys 'R' Us posted a $0.09 Q1 loss, versus $0.06 profit. The Street expected a $0.06 loss. Sales rose 1% despite a 2% drop in U.S. Toys 'R' Us comps, helped by gains online in Babies 'R' Us sales. The company making favorable moves to improve the U.S. toy store format, service and product mix. The costs of these investments will negatively impact the first three lower-revenue quarters of fiscal 2002 (Jan.), but S&P is fairly confident these moves will boost key holiday and future sales and profits, S&P still sees a 4% fiscal 2002 rise in sales and is keeping the $1.45 estimate. Toys 'R' Us reiterated comfort with its $1.42 consensus.

Lowe's Cos. (LOW ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Maureen Carini

Q1 EPS $0.58 vs. $0.49 was better than expected. Although a same-store sales decline of 3% was a bit below the plan, margins benefited from improved productivity and careful control of operating expenses. Aggressive expansion plans were on track, with 37 new stores opened in Q1. The target is 115 for the full year. S&P sees fiscal 2002 (Jan.) sales up 17%, and EPS up 15%. S&P thinks EPS growth is poised for recovery as future results should be driven by improving lumber prices, recent interest-rate cuts and a turnaround at former Eagle sites. Shares are attractive at 29 times the $2.48 fiscal 2002 estimate.

Ford Motor Co. (F ): Maintains 3 STARS (hold)

Analyst: Efraim Levy

Ford will recall about 47,000 of its 2002 Ford Explorer and Mercury Mountaineer SUVs and will replace tires damaged during the manufacture of the vehicles. This is the second recall of the updated version of Ford's top-selling SUV, Explorer, and could further hurt demand. The vehicle was redesigned to enhance passenger safety following fatal accidents involving Explorers with Firestone tires installed. While the direct financial cost of this latest recall will be relatively modest, the damage to confidence in the Ford brand could send would-be buyers to rivals.

E*Trade (ET ): Reiterates 3 STARS (hold)

Analyst: Michael Schneider

The leading online broker agreed to acquire Web Street Inc., an online broker with 34,000 active accounts and offices in San Francisco, Boston, Beverly Hills, Calif., and Denver, Colo., for $45 million in stock. The purchase price is a hefty premium to Web Street's $21 million market cap on Friday's close. But S&P still expects the deal to be immediately accretive to E*Trade's revenues and EPS. The fragmented online-brokerage industry is ripe for consolidation, as many smaller players are finding it hard to compete. S&P sees fiscal 2001 net revenues at $1.1 billion, and sees fiscal 2001 EPS from ongoing operations of $0.03.

Procter & Gamble (PG ): Maintains 4 STARS (accumulate)

Analyst: Robert Gold

Procter & Gamble agreed to buy Bristol-Myers' Clairol business for $4.95 billion in cash, and the company sees no antitrust issues blocking the buy. Within the U.S. chain store market, the move will boost P&G's shampoo share towards 43%, provide foothold into the growing hair-coloring market where Clairol has an approximate 37% share. After tax-deductible goodwill, P&G is paying $4.0 billion cash, or 12 times the EBITDA for the unit with lofty 26% EBITDA margins and a faster growth rate than it's current hair-care business. Integration risks are heightened by turmoil at other areas of P&G, but cost synergies should eliminate the EPS dilution by year two.

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