Downgrading Health Management to Hold

Also: analysts' opinions on Peregrine Systems and Amazon; plus others

Health Management (HMA ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Robert Gold

The company posted June-quarter EPS of $0.21 vs. $0.18, in line with S&P's estimate. All key operating statistics suggest further strength is ahead, and the company remains far beyond peers in terms of operating margins. However, further margin expansion will be difficult, given accelerating wage inflation and the impact from recent acquisitions. S&P is leaving the fiscal 2001 (Sept.) EPS estimate at $0.80, and keeping the fiscal 2002 estimate at $0.91. After a recent run, Health Management is nearing its full valuation at 25% of the price-to-earnings premium to the healthcare group, and a 50% premium on a price-to-sales basis.

Peregrine Systems (PRGN ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Mark Basham

Shares have fallen recently in sympathy with the software sector as numerous firms have trimmed second-half growth expectations. S&P expects a similar story from Peregrine, but the extent of the reduction in guidance is not exactly certain. S&P has trimmed the fiscal 2002 (March) cash EPS estimate to $0.60 vs. 2001's $0.53. S&P sees reacceleration in 2003 to 50% growth, and sees $0.90 cash EPS. S&P thinks the selloff is overdone if S&P's revised estimates are in line with the company's new guidance. Based on a free cash flow model, S&P is keeping the $30 target. (AMZN ): Maintains 3 STARS (hold)

Analyst: Scott Kessler

The online book and music seller posted a Q2 operating loss of $0.16 vs. a $0.33 loss, much better than S&P's high-end estimate of a $0.20 loss. Revenue rose 16%, but fell 5% sequentially from Q1, reflecting only 1% growth in the U.S. books, music and video/DVD segment (58% of revenues). Sales in the electronics, tools and kitchen area posted an increase of 47%, excluding the impact of 2001 toy and video game revenue, which now goes to Cost/expense management improved again on efficiencies and leverage. S&P sees 2001 sales of $3.1 billion, down 8% from the previous estimate. Despite concerns about growth, at 1.4 times 2002 sales and with a fresh injection of $100 million from America Online, S&P would hold

AT&T (T ): Maintains 3 STARS (hold)

Analyst: Craig Shere

Excluding other income and equity earnings, Q2 operating EPS were $0.04 vs. $0.47, in line with S&P's estimates. Growth in Broadband margins shows potential for long-term value, and gives AT&T ammunition for defying Comcast's hostile takeover bid. Ultimate Broadband IPO is important for management's deleveraging campaign. Business margins rose sequentially and the decay of Consumer margins is slowing. The $1.1 billion write down of AT&T's year-old Net2Phone investment underscores the company's difficulty in creating shareholder value. The break-up value probably is worth over $24 a share, but there aren't any near-term catalysts for a change.

USX-Marathon Group (MRO ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Tina Vital

USX-Marathon posted Q2 EPS of $1.88 vs. $1.18 -- $0.37 above the Street's estimates. Exploration & production income rose 29% (from Q2 2000) on higher natural gas prices. Refining & marketing income rose 59% on wider margins. Barrel of oil equivalent (BOE) production fell 6.3% (from Q1) to 411,700 BOE per day. The company revised its 2001 production estimates down 10,000 BOE per day to to 420,000, and sees 2002 estimates at 430,000-435,000 BOE per day. Separation of the USX steel and energy units will be complete by yearend. S&P sees 2001 EPS at $5.84, and sees 2002 EPS at $5.70. Despite shares at trading at five times the 2002 EPS, which is at a discount to peers, S&P would hold the shares as commodity prices are under pressure and some production issues still need to be solved.

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