Still Hold Hewlett-Packard

Plus: analysts' opinions on Longs Drug Stores and PG&E

Hewlett-Packard (HWP ): Still 3 STARS (hold)

Analyst: Megan Graham Hackett

At a February 27 analyst meeting, the company said it plans a 9% operating margin for new HWP/Compaq, when the merger is fully completed. It also estimates cash flow from operations of $6B, net of capital expenditures. It sees fiscal year 2003 (October) EPS of $1.51 for new cocmpany, 12% above the street mean for HP as a stand alone company.

While S&P views the company's projected $2.5B in cost synergies as achievable, S&P also expects the new company could suffer more than the 5% revenue loss HP projects. While the maker of personal computers did a better job in outlining integration plans, strategic positioning of the new company still appears weak, S&P adds.

Longs Drug Stores (LDG ): Still 2 STARS (avoid)

Analyst: Joseph Agnese

The company posts Jan-Q EPS of $0.58 vs. $0.63, before charges, $0.04 above S&P's estimate. The company also announced the retirement of its CEO retirement, and a subsequent search for permanent replacement. Meanwhile, same-store sales were up only 1.4%, well below industry peers. Pharmacy sales gained 6.8%, limited by fewer prescriptions. Non-prescription same-store sales fell 2.2%.

The company is beginning initiatives to end negative trends, moves that hve been long overdue, S&P notes. S&P expects to add annual $0.76-$1.00 to EPS by fiscal year 2006 (January) S&P is reducing its fiscal year 2003 EPS estimate to $1.30 from $1.36, reflecting deteriorating environment. Shares of the company also remain unattractive at 19 times that estimate, S&P notes.

PG&E (PCG ): Reiterates 2 STARS (avoid)

Analyst: Justing McCann

S&P views the U.S. Bankruptcy Court ruling late February 20 as a new setback for the utility's reorganization plan for its Pacific Gas & Electric unit. The judge rejected the company's attempt to have only its own reorganization plan before court. The ruling allows California Public Utility Commission to submit its own plan, which would keep company's power generating assets under state regulation. The setback follows earlier court rejection of PG&E's claim that state laws could be preempted by bankruptcy court rulings. S&P advises avoiding PG&E shares until the reorganization outlook becomes clearer.