Downgrading AOL Time Warner to Accumulate

Also: analysts' opinions on Medquist, Donaldson and other stocks

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

Analyst: Scott Kessler

Despite the appeal of 135 million subscriptions and unparalleled media assets, S&P is somewhat uneasy with the risk-reward profile. S&P believes the company may have trouble reaching the $10.0 billion Q3 revenue estimate amid a more challenging advertising climate than expected. The recent marketing alliances providing for AOL purchases from advertising partners bear this out. At 34 times the 2001 estimate of $1.27 (well above the p-e of the S&P 500) and 18 times the 2001 estimated EBITDA of $10.6 billion (above peers), S&P sees the price as attractive vs. growth but not compelling in light of a greater risk.

Medquist (MEDQ ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: John Massey

S&P believes the recent stock slide reflects concern over Medquist's dependence on acquisitions to maintain growth. The company recently posted Q2 EPS of $0.28 vs. $0.30. Revenue rose 7.7%, but internal growth slid to the mid-single digits. The company added 200-250 transcriptionists in Q2. Gross margin fell to 26.2% vs. 28.3%. Selling, general and administrative costs as percent of sales rose, due to acquisitions. Medquist on July 1 acquired Your Office Genie, the fourth largest medical transcription company. With shares trading at 19 times S&P's 2002 EPS estimate of $1.35, and with 20% long-term EPS growth projected, S&P believes Medquist is fairly valued.

WebMD (HLTH ): Dropping coverage, was 3 STARS (hold)

Analyst: John Massey

The provider of online transaction connectivity products and services, healthcare web sites, and medical news for the healthcare world is attempting to integrate disparate facilities, reduce cost structure and be cash-EPS positive. The company recently reported Q2 revenue declined 3.1% from Q1, primarily because of the weak Internet advertising market. WebMD faces significant challenges in its turnaround plan, and is expected to see new competition. S&P last rated WebMD shares as hold.

Schering-Plough (SGP ) : Maintains 3 STARS (hold)

Analyst: Herman Saftlas

The deal allows drug maker Schering-Plough to market its Peg-Intron A, and for Roche to sell its Pegasys drug free from patent infringement. Last week, Schering-Plough received FDA approval to sell an improved version of Peg-Intron A/Rebetol for hepatitis C. S&P sees sales of that product rising 23% to $1.7 billion in 2002. However, the Schering-Plough's lead Claritin drug is facing patent expiration in 2002 and FDA approval for enhanced Clarinex has been held up by manufacturing issues. Schering-Plough and Merck plan to file an application for a new cholesterol drug. Schering Plough is valued at a 15% discount to peers.

Donaldson Co. (DCI ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Stewart Scharf

The maker of air cleaners and exhaust systems sees July quarter EPS above the Street's $0.42 estimate, based on strong gas turbine shipments and backlog, and on cost controls. S&P expects demand to continue, and sees wider margins on more sales of higher-margin industrial products and on cost cuts. Despite exposure to the more cyclical original equipment manufacturers (OEM) businesses, S&P expects further positive trends as the economy recovers in 2002 and sees Donaldson using cash for buybacks and debt paydowns. S&P is raising the fiscal 2001 EPS estimate by $0.05 to $1.70, and is upping the fiscal 2002 estimate by $0.10 to $1.90. With shares at a discount to S&P's MidCap 400 price-to-earnigns of 22, S&P thinks investors should add to their positions.

Cendant Corp. (CD ): Maintains 4 STARS (accumulate)

Analyst: Thomas Graves The diversified consumer services company agreed to acquire Cheap Tickets Inc., a deal that is consistent with Cendant's emphasis in the travel and real estate areas. S&P doesn't see the price adding much financial risk. Excluding unusual items and some Internet-related businesses, S&P is keeping the 2001 EPS estimate of $1.10, and sees 2002 EPS at $1.40, including full-year benefits from the pending Galileo International acquisition and an expected change in goodwill accounting, plus outsourcing and licensing changes related to Cendant's individual ownership business. Based on the expected free cash flow and price-to-earnings at 14 times the 2002 EPS estimate, Cendant is attractive.

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