S&P Downgrades King Pharmaceuticals to Hold

King Pharmaceuticals (KG ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Howard Saftlas

The drug maker posted a 29% rise in fourth-quarter EPS to $0.31, in line with expectations. Revenues rose 45%, driven by a 70% advance in sales of its Altace heart drug, and a 136% increase in its Levoxyl thyroid treatment. However, King is facing increased competition in both markets. Also, the company recently recalled certain anti-infective drugs because of sterility issues at a third-party manufacturer. King is reliant on new product acquisitions to fuel growth. Shares are valued at a modest premium to the specialty drug group.

Microsoft (MSFT ): Maintains 4 STARS (accumulate)

Analyst: Jonathan Rudy

The company teamed with Intel on a template for cellphones. The two companies are trying to extend its successful PC operating model to the cellphone market. The template will employ software from Microsoft and chips from Intel, with a third-party cellphone maker handling production. While this will be a more complicated market for Microsoft to compete in, it is a logical extension of the Windows platform as cellphones are increasingly used for PC-like functionality. S&P believes that this is a worthwhile strategy to pursue with a potentially significant market opportunity for Microsoft.

UAL Corp. (UAL ): Maintians 1 STAR (sell)

Analyst: James Corridore

Shares are up sharply Tuesday on news that UAL reached a tentative agreement with mechanics. While the move now is likely to avert a disastrous strike, the company still has many issues to tackle, and the large, agreed-upon pay hike will further weaken the company financially. UAL is losing over $8 million per day and will likely have to leverage itself further to maintain liquidity. Other labor issues remain, and it's likely that labor concessions will not be enough to restore profitability. S&P thinks investors will shortly refocus on the longer-term, more shaky outlook for UAL.

Travelocity.com (TVLY ): Maintains 3 STARS (hold)

Analyst: Scott Kessler

Sabre Holdings is offering $23 per share to acquire the 30% of Travelocity it doesn't already own. Travelocity has formed a special committee of independent/outside directors to consider and recommend options. Although it holds the majority of Travelocity stock, the completion of a deal as offered is not inevitable. Travelocity is trading at above $23 offer, suggesting that the potential for a higher offer from Sabre or another company is possible. However, S&P expects ultimately that Travelocity will be bought out by Sabre at or around the current price.

AmeriPath(PATH ): Maintains 5 STARS (buy)

Analyst: Markos Kaminis

Following a fourth-quarter EPS conference call, S&P remains confident of AmeriPath's outlook. The company says that lost Alabama business is recoverable via a recent acquisition in the state. AmeriPath provided guidance of $0.40-$0.41 for Q1 EPS, and $1.80-$1.84 for full year 2002. The guidance on a same-store sales rise of 10%-11% for the full year was bit below S&P's expectations, but the company's expectations have typically been conservative. Nevertheless, S&P is trimming the 2002 EPS estimate by $0.03, to $1.85 and still views AmeriPath as attractive at 14 times the 2002 estimate, against 20% long-term growth expected.

Ciena (CIEN ): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Ari Bensinger

The planned acquisition of ONI Systems greatly enhances Ciena's metro-product portfolio. With its leading core transport and switching solutions, Ciena now can offer best-of-breed end-to-end next-generation optical solutions. The deal adds 20 new customers and important OSMINE certification needed to deploy equipment into legacy regional bell operating company networks. The transaction would be non-dilutive in 2002, and accretive in 2003. Ciena targets $55-65 million in expense synergies. The combined company will have $1.3 billion cash net of debt. The deal significantly improves the future growth outlook.

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