Downgrading Agilent to Sell
Agilent Technologies (A ): Downgrades to 1 STAR (sell) from 3 STARS (hold)
Analyst: Megan Graham-Hackett
The company posted a Q3 loss of $0.24 vs. the Street mean of a $0.35 loss. EPS quality was weak with upside on selling, general and administrative cuts, although the company had a positive operating cash flow. The story was the 54% drop in orders. Agilent now sees Q4 revenue of $1.3 billion to $1.5 billion, and a loss of $0.50-$0.70. The company will cut jobs to lower the break-even point to $1.9 billion. While order cancellations were cut in half and Q4 orders for computer and enterprise components were seen up vs. Q3, S&P now sees a fiscal 2001 (Oct.) loss of $0.05, and a fiscal 2002 loss of $0.25. Agilent's price-to-sales multiple of 1.2 is below peers, but with losses seen for the next several quarters, Agilient should underperform.
Target (TGT ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)
Analyst: Karen Sack
Target posted Q2 EPS in line with estimates. The results rose 7.0% to $0.30 on a 2.0% gain in same-store sales. The department store segment is suffering with pretax profit down 56%, but pretax profit is up 9.2% in the Target segment and 9.5% at Mervyn's. The company sees continued weak sales in Q3. S&P expects the retail landscape to remain highly competitive through Q4, particularly for department stores. A seasonal battle has just begun, with Target suing Kmart for false advertising. S&P is lowering the fiscal 2002 (Jan.) EPS estimate by $0.05, to $1.50, but sees a 6% rise in fiscal 2003 EPS.
Guidant (GDT ): Upgrades to 3 STARS (hold) from 2 STARS (avoid)
Analyst: Robert Gold Shares are higher Tuesday on news Guidant obtained exclusive global distribution rights to privately-held Cook Inc.'s paciltaxcel-coated stents. Collaboration should help Guidant to more effectively compete with Johnson & Johnson in a race to commercialize a coated stent, with Cook about six months ahead of Guidant in European clinical trials and perhaps more in the U.S. The deal effectively adds second-coated stent to products in development. At a modest 19 times S&P's 2002 EPS estimate of $1.85, and given strategic the benefits of the Cook relationship, S&P believes Guidant can track broader markets.
Keane (KEA ): Upgrades to 2 STARS (avoid) from 1 STAR (sell)
Analyst: Mark Basham
Shares are down 7% Tuesday on Keane's deal to acquire Metro Information Services for $203 million in stock and debt. S&P is paying about 0.7 times revenues for the struggling IT services company. S&P assumes Keane will retain nearly all of Metro's clients. S&P expects the primary benefit to be from a consolidation of Metro's branches into Keane's, and thinks the cross-selling potential is questionable. But assuming the majority of the projected $15 million annual cost savings is realized in 2002, S&P is upping the 2002 EPS estimate from $0.62 to $0.67. S&P also is raising the calculation of intrinsic value from $13-$15 to $15-$17.
Myriad Genetics (MYGN ): Maintains 5 STARS (buy)
Analyst: Frank DiLorenzo
The company's Q4 predictive medicine sales of $5 million were in line with S&P's forecast. The $0.09 loss per share was a penny more than S&P expected, and S&P anticipates that the Prolaris predictive medicine test for prostate cancer will launch by the end of 2001. Pivotal trials of MPC-7869 to treat prostate cancer should start by early 2002. S&P projects predictive medicine sales of $28 million in fiscal 2002 (June) and $42 million in fiscal 2003. S&P estimates losses per share of $0.29 in fiscal 2002 and $0.31 in fiscal 2003. Based on prospects and net present value analysis of products and pipeline, S&P feels Myriad is undervalued.
American Eagle Outfitters (AEOS ): Maintains 4 STARS (accumulate)
Analyst: Maureen Carini
The fashion retailer posted Q2 EPS $0.21 vs $0.04, in line with estimates. Total sales grew 40% on a 4.6% same-store sales increase, contributions from Thrifty/Blue Notes acquisition in Canada and 28 new stores. Although overall consumer spending remains sluggish, S&P remains encouraged by American Eagle's growth in its average unit retail price, transactions per store and average transaction size. Margins should continue to benefit from higher markons and lower markdowns. With 20%-plus average EPS growth over the next three to five years, S&P think shares are attractive at 19 times the fiscal 2002 (Jan.) EPS estimate of $1.65.