Still Buy Tenet Healthcare

Also: analysts' opinions on Nortel Networks and Eli Lilly

Tenet Healthcare (THC ): Maintains 5 STARS (buy)

Analyst: Robert Gold

The company met preannounced targets for the August quarter with a 40% surge in operating EPS to $0.67. Earnings were fueled by 5.9% growth in admissions, an increase in higher-acuity admissions, operating cost disciplines and lower interest costs. Same-unit admissions rose 3.5%, below their abnormally high 4.3% year-ago growth but well above the historic average. EBITDA is headed towards the top of the peer group, at 19.0% vs. 17.9%, and S&P continues to expect full-year EBITDA margins will approximate 20%. Free cash flow is $1.34 billion over the last 12 months.

Nortel Networks (NT ): Maintains 3 STARS (hold)

Analyst: Ari Bensinger, Jonathan Rudy

Nortel expects Q3 revenues of $3.5 billion and an operating loss of $0.28 per share. Nortel also expects weaker than expected revenues of $4.6 billion and a loss per share of $0.17. Results exclude restructuring, amortization and incremental charges. Nortel says that customers are starting to approach a sustainable level of spending. With further cutbacks, the company expects to break even at a quarterly revenue run-rate below $4 billion, down from the previous $5 billion estimate. S&P is placing its estimates under review. With a leading market position and improved cash management, S&P says hold Nortel for a recovery.

Eli Lilly (LLY ): Maintains 3 STARS (hold)

Analyst: Robert Gold

Noting the rapid erosion in Prozac sales and a planned rise in spending to support the drug pipeline, Lilly lowered the 2001 and 2002 EPS goals. We had assumed generic Prozac would cut into forward sales growth, which is settling into the single-digits area, but expected net margin squeeze and a lower free cash flow outlook to place shares at risk given the premium valuation vs. drug peers and the S&P 500. The story is squarely focused on the success of new products including Xigris, Forteo, Cialis and others. S&P is lowering the 2001 estimate by $0.05 to $2.75, and trimming the 2002 by $0.19 to $2.75. S&P would not add to positions.

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