Downgrading Tiffany & Co. to Avoid

Tiffany & Co. (TIF ): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Thomas Graves, D. Milton

The luxury jeweler posted Q2 EPS of $0.24 vs. $0.26, in line with estimates. U.S. comp-store sales fell 4%, against strong year-ago growth. The company's EPS guidance for the rest of fiscal 2002 (Jan.) is not especially encouraging. S&P is lowering the fiscal 2002 EPS estimate to $1.29, from $1.34 and is reducing fiscal 2003's to $1.45, from $1.54. S&P still thinks Tiffany has a good business with an excellent brand, but doesn't see an EPS outlook favorable enough to generate much near-term enthusiasm among investors. The shares are amply valued at 25 times the fiscal 2002 EPS estimate, and 22 times the fiscal 2002 estimate. Lincare Holdings (LNCR ): Downgrades to 3 STARS (hold) from 5 STARS (buy)

Analyst: Robert Gold

Shares have given up the bulk of 2001 gains in recent weeks, most likely on uncertainties about Medicare 2002 oxygen reimbursement rates. S&P believes that near-term valuation expansion is unlikely, pending resolution of that issue, and that any decision not to grant a CPI-related oxygen increase could result in a modest revision to Lincare's 2002 EPS estimate. For now, S&P is leaving the 2001 estimate at $1.33, with 2002 at $1.60. But S&P believes cost pressures that are building within Medicare could adversely impact home-health companies. S&P would take a wait-and-see approach to Lincare. Charles Schwab (SCH ): Maintains 3 STARS (hold)

Analyst: Robert McMillan

Press reports say the discount brokerage is in talks to acquire Los Angeles-based brokerage firm Jefferies Group for more than $1 billion, citing unnamed sources. S&P would view such an acquisition positively, since it would allow Schwab to reduce its reliance on volatile commission and trading revenue, and enhance institutional trading business. Given the still-volatile nature of the stock market and declines in year over year trading volume at Schwab for several months in a row, S&P still expects shares to perform in line with the market.

Hormel Foods (HRL ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Richard Joy

The maker of Spam and canned foods posted July-quarter EPS of $0.24 vs. $0.21, $0.02 below expectations. Sales were up 17% on acquisitions and rise in sales of value-added products. Grocery and turkey operations are doing well, but foodservice business is being hurt by the slowing economy. Margins were penalized by higher than anticipated pork costs. The integration of recent acquisitions is going well, and should help offset cost pressures. Given the momentum in core products and Hormel's new value-added offerings and efforts to reduce commodity exposure, the company is worth holding at 16 times S&P's fiscal 2002 (Oct.) EPS estimate of $1.55.

Zimmer Holdings (ZMH ): Initiates with hold opinion

Analyst: Robert Gold

Zimmer is a recent spin-off from Bristol-Myers Squibb and is a pure play in orthopedic devices. The bulk of sales (75%) lie in the reconstructive area, which will remain principal the revenue growth driver given its non-exposure to the dynamic spinal segment. The lack of spinal presence may restrict valuation vs. some peers, but solid reconstructive trends should allow for 9%-11% revenue growth, and 11%-13% EPS growth over the next three years. S&P sees $0.95 2001 EPS on $1.15 billion revenue and $1.05 2002 EPS on $1.25 billion revenues. At 27 times the 2002 EPS estimate and 4.3 times 2002 sales, Zimmer is fully priced relative to peers.