Sears (S ): Upgrading to 5 STARS (buy) from 4 STARS (accumulate)
Analyst: Karen Sack
The retailer's fourth quarter was better than expected. Gross margin improved and expenses held in check, even with a 2.4% drop in Dec. same-store sales. Also, operating growth was strong in the credit business, which accounts for 50% of net income. S&P raises its 2001 EPS estimate by $0.13, to $4.22, about level with 2000. S&P expects temporary disruption in sales as Sears remodels stores, adding central checkout and streamling apparel selection. Those moves should be offset by cost savings. S&P sees 13% EPS growth in 2002 and 2003. Sears is trading at only 9.5 times S&P's 2003 estimate of $5.35. S&P has a 12-month target price on the stock of $64.
Clayton Homes (CMH ): Maintain 5 STARS (buy)
Analyst: Michael Jaffe
December quarter EPS $0.24 compared with $0.20 a year ago beat all forecasts, reflecting better financial services results, firming of manufactured home business. Nov. and Dec. marked the first industry shipment gains in 2 and 1/2 years. The gain was against depressed numbers, but that suggests industry actions to shut plants and retail sites is paying off. Clayton also gained market share during the slowdown. S&P is hiking its fiscal 2002 (June) estimates to $0.95 from $0.90 and fiscal 2003 to $1.15 from $1.10. At 15 times fiscal 2003 estimates, which is in the low to mid-point of the stock's historical range, S&P recommends buying Clayton in anticipation of a sector recovery.
Costar Group (CSGP ): Downgrading from 3 STARS (hold) to 1 STAR (sell)
Analyst: Mark Basham
Shares have risen in recent weeks on economic hopes. While S&P does see economic recovery in 2002, it expects it will be on the weaker side. Furthermore, commercial real estate is likely to be among lagging sectors. S&P expects Costar revenue gain of 15%-17% in 2002, but this is below company guidance. S&P's $0.15 EPS estimate for 2002 also is well below the $0.50 Street consensus. Shares could tumble well below the estimated $20 intrinsic value if 2002 disappoints.
Barnes & Noble (BKS ): Upgrading to 5 STARS (buy) from 4 STARS (accumulate)
Analyst: William Donald
A 13.2% jump in holiday bookstore sales was better than expected. Same-store sales rose 5.5% while GameStop sales jumped 67%, with same-store sales up 60%. S&P is raising its consolidated fiscal 2002 (Jan.) EPS estimate to $1.15 from $1.08. S&P is projecting $1.80 for fiscal 2003, boosted by stronger gains in book and game sales, higher-margined GameStop product mix, and lower online losses. At only 17.2 times fiscal 2003 estimate, the retailer is trading near the bottom of a 5-year range. S&P sees a gradual rebound continuing. S&P ups its 12-month target of $36 to over $40. Cigna (CI ): Maintain 3 STARS (hold)
Analyst: Phillip Seligman
Cigna plans to consolidate service operations in its employee health care, life, and disability benefits units. It will cut 2,000 jobs, taking a $65 million aftertax charge. It sees annual cost savings of $45-$55 million aftertax starting in 2003. The company expects 2001 and 2002 operating income in line with previous guidance. Hence, S&P still sees 2001 EPS of $6.95 and 2002 EPS of $7.65 before goodwill accounting change. S&P is pleased that the company is moving to cut its SG&A ratio, but would not be surprised if Cigna reinvested some savings in growth initiatives amid a competitive landscape. The stock is fairly valued at 12 times 2002 estimates versus estimated 12% long-term EPS growth.
Toys R Us (TOY ): Maintain 4 STARS (accumulate)
Analyst: William Donald
Total sales rose 5%, stores open at least a year posted sales growth of 2% for the 9-week holiday period, in line with expectations. International sales gained 7% and online sales jumped 27%. But the retailer notes that Q4 margin pressures are intense because of heavier weighing of video hardware in product mix and high promotional costs. The company expects these pressures to ease in coming months on faster growth in sales of higher-margined software products, lowered inventories and other measures. S&P is keeping its fiscal 2002 (Jan.) EPS estimate at $0.96 and $1.32 per share estimate for fiscal 2003. The company has a 12-month target of $25 to $26.
EchoStar Communications (DISH ) and Hughes Electronics (GMH ): Maintain 4 STARS (accumulate) on both
Analyst: Howard Choe
The nation's largest farm organization supports the pending merger of the two companies, noting that it would greatly help provide enhanced video and broadband services to farm communities. The endorsement should bolster EchoStar's argument to the government that the merger would be more beneficial to rural America as synergies derived from the combination would accelerate its ability to provide enhanced services with uniform pricing, regardless of geography. The shares are still attractive, trading at a considerable discount to those of cable TV companies.
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