Downgrading General Motors to Avoid
General Motors (GM ): Downgrades to 2 STARS (avoid) from 3 STARS (hold)
GM, Korea's Daewoo Motor and Daewoo's credit committee agreed to a non-binding memorandum of understanding to form a new company that would own certain Daewoo Automotive domestic and foreign operations and have about $5 billion in annual sales. S&P is encouraged that GM and its partners' $400 million investment, which gives them a 67% stake, will include less than a 50% stake for GM. This eliminates the need to consolidate the new company's debt on GM's balance sheet. Daewoo creditors will own the other 33%. But S&P is concerned about slowing vehicle sales, and the need for more costly incentives.
Nike (NKE ): Maintains3 STARS (hold)
Analyst: Maureen Carini
The shoe apparel company posted $0.75 vs. $0.77 Aug-quarter EPS -- better than expected. Sales slipped 1% as continued sluggishness in U.S. footwear sales was mostly offset by strong gains in Asia and South America. But S&P is pleased with a 6% rise in futures orders that showed growth in all geographic regions. More noteworthy is that it's the first quarterly rise in U.S. futures in four years. Gross margin still is hurt by closeout sales and a negative foreign exchange impact. But selling, general and administrative costs were well-contained. With the external economic outlook uncertain, S&P believes Nike is fairly valued at 17 times the $2.45 fiscal 2002 (May) EPS estimate.
Applied Materials (AMAT ): Reiterates 5 STARS (buy)
Analyst: Richard Tortoriello
The company will cut 10% of workforce, or more than 2,000 workers, due to the length and severity of the economic downturn and the lack of near-term visibility. As the dominant competitor in the semiconductor capital equipment industry, Applied Materials stands to benefit from three converging trends: the move from 8" to 12" wafers, the use of copper vs. aluminum wiring and the continued shrinking of device sizes from 0.25 micron to 0.13 micron and below. With Fed rate cuts and a likely fiscal stimulus, S&P sees Applied Materials as attractive at 2.8 times trailing sales and 3.5 times the book value, just above cycle-trough valuations.
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