Starting ChevronTexaco with Buy
ChevronTexaco (CVX ): Initiates with 5 STARS (buy)
Analyst: Tina Vital
This newly-formed energy giant is the product of the Oct. 9 merger of Chevron and Texaco, which S&P had rated as buy and accumulate, respectively. Shell Oil and Saudi Refining had cleared the way for the deal by agreeing to buy Texaco's refining interests in Equilon and Motiva for about $3.85 billion (56% cash, 44% debt). The valuation was in line with expectations but less than other recent refining deals; closing is expected in Q4. With the Chevron-Texaco merger offering the potential for p-e multiple expansion and cost savings ($1.2 billion within six to nine months), S&P considers CVX attractive.
Rational Software (RATL ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)
Analyst: Jonathan Rudy
Rational posted second-quarter pro forma EPS of $0.05 compared with $0.17, one penny below estimates. Revenues declined 13%, with license revenues down 33% and service revenues up 16%. S&P expects fiscal 2002 (March) revenues down 15%. S&P is lowering its fiscal 2002 and 2003 estimates to $0.28 and $0.51, from $0.52 and $0.60. With a price to earnings growth ratio of 1.7, S&P would not add to positions now. However, with over $4.50 per share in cash and short-term investments, a significant stock buyback, the shares are worth holding.
American International Group (AIG ): Upgrades to 5 STARS (buy) from 4 STARS (accumulate)
Analyst: Catherine Seifert
AIG raised its pre-tax loss estimate from the September 11 attacks to $800 million, from $500 million. The company also announced a $1.36 billion integration charge related to its American General acquisition. S&P expected the company's claim related to the attacks to rise and shares the market's surprise at the magnitude of the AGC-related charge. S&P is trimming its 2001 estimate for operating EPS by $0.35, to $2.45, before the AGC charge. S&P is raising its 2002 operating EPS forecast by $0.15, to $3.50. Shares could move on strong P/C pricing and favorable long-term retirement savings trends. S&P's six to twelve month price target is $90.
American Express (AXP ): Upgrades to 3 STARS (hold) from 2 STARS (avoid)
Analyst: Robert McMillan
A U.S. Court ordered that Visa and Mastercard let their member banks issue their rivals' cards. Although difficult to quantify, S&P thinks this is a significant positive for AXP in the long run. Separately, the company says it is exiting educational lending in order to better focus on core business. The move will not have material impact on results. S&P is maintaining its 2001 EPS estimate of $1.11. Given a strong franchise and ongoing restructuring efforts, S&P thinks the stock will perform in line with the market.