Raising Dynegy to Accumulate

Dynegy Inc. (DYN ): Upgrading to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Craig Shere

Fourth-quarter operating EPS of $0.41 vs. $0.32 was in line with expectations. Dyngey is gaining market share in the wake of Enron's collapse. Contributions from acquired U.K. gas storage and new 2002 generating plants will aid EPS growth. Potential for monetizing slow-growth gas processing through new master LP would also boost earnings. In addition, S&P sees EPS benefiting from 2002 payment of reserved California receivables. S&P is assuming p-e of 12 on its $2.30 2002 EPS estimate, shares have 10% upside. That p-e target is modest, given 15%-plus long-term EPS growth and market's p-e.

Merrill Lynch (MER ): Upgrading to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Robert McMillan

December quarter EPS of $0.48 before restructuring charges, vs. year-ago $0.93 were in line with expectations. Results were hurt by especially sharp declines in commission, principal transaction and underwriting revenue, and by September 11 charges. The company maintained strong market share positions. Cost cuts should help future profitability. In reviewing its estimates, S&P says with Merrill stock looks attractive trading at about 16.5 times the Street's $3.33 estimate for 2002, which is below peers.

Cadence Design (CDN ): Raising to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: R.Tortoriello

The leading maker of semiconductor design software reported fourth-quarter earnings per share, before goodwill and special charges, of $0.27, vs. $0.24, a penny ahead of the Wall Street consensus forecast. Revenue rose 11% sequentially, down 3% from a year ago. Cadence sees 30% EPS growth in 2002, assuming a flat economy. S&P believes Cadence's strong product portfolio in both analog and digital design, coupled with growth in designs at leading-edge (0.18 micron and below), bode well for growth. S&P sees the shares as attractive at 19 times 2002 S&P's EPS estimate of $1.14, with a p-e/growth ratio of 0.90.

Fortune Brands (FO ): Maintain 5 STARS (buy)

Analyst: Howard Choe

The company posted fourth-quarter EPS of $0.78 vs. $0.71, in line with S&P's guidance but $0.04 above the Street consensus. Total sales declined 1.9%, reflecting the soft economy and Fortune's ailing office product division. However, golf sales were up a surprising 8.8% and spirits and wine rose a strong 8.5%. Operating margins slipped a bit due to lower volume, but overall cost containment was impressive. The company's balance sheet has improved and 2001 free cash flow rose 39%. Fortune is undervalued, as the shares trade at 14 times S&P's 2002 EPS estimate of $2.66 and discount cash flow model implies value of the stock in the low $50 range.

Fairchild Semiconductor (FCS ): Maintain 5 STARS (buy)

Analyst: Megan Graham-Hackett

The company posted fourth-quarter EPS of just over breakeven, well ahead of Street mean loss forecast of $0.04 a share. Revenues were off 31% to $325 million, above expectations, aided by strength in computing, but the real surprise was gross margin of 24.2%, up 420 basis points vs. the third quarter on better utilization. Bookings were up 8% sequentially, and book-to-bill was above 1:1. The company notes that pricing is still aggressive, but it sees firming by the end of the third quarter. It sees first-quarter revenues down 3% to 5%, in line with S&P's estimates and seasonal patterns. S&P is raising 2002 estimates of $0.08 per share to $0.29. At 1.9 price-to-sales, the stock is trading below its peers.

Schlumberger (SLB ): Downgrading to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Tina Vital

Fourth-quarter EPS of $0.32 vs. $0.42 was a penny below Street expectations. Earnings before interest, tax, depreciation and amortization were up 9.6% on a 1.2% drop in revenues from the third quarter and reflects flat earnings in Oilfield Services (M-I rig count down 13%). Sema earnings rose 9.5% from the preceding quarter, but S&P expects IT customers to cautiously spend in 2002. S&P sees 2002 EPS at $1.63, 2003 at $2.60. Avoid Schlumberger as shares are trading at high relative valuations to peers, a rebound in earnings is dependent on timing and strength of North American economic recovery and limited by development costs related to the pricey Apr. 6 purchase of Sema.

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