Costco Still a 'Buy'

Costco Wholesale (COST ): Maintains 5 STARS (buy)

Analyst: Karen Sack

The company posted January quarter EPS in line with expectations, up 4% to $0.77. A strong 8% rise in same-store sales boosted operating profit 10.7%. Total sales remain strong, rising 8% in February. Fresh food and hardlines are the strongest categories, while apparel sales are improving. Costco is opening 32 new units and relocating seven in fiscal 2002 (ending August). The accelerated new openings of the past two years bode well for EPS gains as each new unit matures. Also, web site sales are strong and profitable. S&P anticipates a 14% increase in fiscal 2002 EPS to $1.47 and at least 14% gains in fiscal 2003 and beyond. S&P's 12-month target price: $54.

PacifiCare (PHSY ): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Phillip Seligman

The company is cutting overhead and exiting unprofitable markets, raising rates, and rolling out new products. Commercial medical loss ratio has improved, but too many overhanging clouds remain: A legal battle vs. the Texas Attorney General, who claims PacifiCare owes tens of millions of dollars; about $680 million debt due Jan. 2000, of which the company's refinancing plans are unclear; and heavy capitation exposure, with the potential for a capital drain if more capitated providers become insolvent. The 2002 EPS estimate of $3.30 includes a $1.60 accounting gain. The 2003 estimate is at $3.60 EPS.

Staples (SPLS ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Maureen Carini

The company posted $0.29 vs. $0.20 fourth quarter EPS before charges better than expected. Total sales grew 3% despite 2% lower same-store sales. But S&P is ecouraged by the rising customer count, and by higher margins from a better product mix and a turnaround in Europe. S&P sees EPS of $0.78 for fiscal 2003 (Jan.), driven by savings from remerchandising efforts, accelerated store remodels, and a focus on the small business customer. The company will also focus on developing its delivery businesses. Staples' improving fundamentals, and shares trading at 26 times the fiscal 2003 estimate, warrants the premium valuation.

Ballard Power Systems (BLDP ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Craig Shere

The company posted a fourth quarter operating loss of $0.33 vs. a year-ago's $0.33 loss, below consensus. Because of acquisitions, Ballard's cash burn will rise, and the company now expects a $158-$178 million 2002 burn rate... ended '01 with $421 mln liquidity... Despite BLDP fuel cell technology leadership, profit and positive cash flow still many years off.. Market sentiment now favors current cash flow. Ballard is trading above the market-cap-to-liquidity ratio of peers. Given technology leadership and recent political focus on fuel cells, think shares can perform in line with the broader market.

USA Education (SLM ): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Efraim Eisenstein

The market has rewarded USA Education for its strong defensive fundamentals and retail execution. Shares now are at 10 times the book value, and 19 times S&P's 2002 operating EPS estimate of $5.10. To justify these levels, according to S&P dividend discount model, USA Education would have to grow EPS at a high-teens rate in perpetuity, which is unlikely, since student debt is a regulated market growing in the single digits. And the company's status as a government-sponsored entity will end in 2006. With investor sentiment moving towards a more economically sensitive issues, USA still is not attractive.

Sabre Holdings (TSG ): Maintains 3 STARS (hold)

Analyst: Marcos Kaminis

A special committee of independent outside Travelocity directors delivered an initial report calling Sabre's February bid of $23 per Travelocity share "inadequate." The offer was a 19.8% premium to Travelocity's closing price on the day prior to the announcement. However, the committee contends that the offer represents just a 3.1% premium to Travelocity's 30-day moving average at the offer date. S&P would continue to hold Sabre as the company moves to acquire a synergistic growth vehicle.

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