Still Accumulate Calpine

Calpine (CPN ): Maintains 4 STARS (accumulate)

Analyst: Craig Shere

Shares fell more than 10% in trading Tuesday and Wednesday as one credit agency cut its debt rating to "BB" and S&P put the debt rating on "credit watch negative". The reactions follow an announced new $2 billion credit facility (only $1.6 billion in incremental borrowing capacity) secured by certain assets, which reduces the resources available to pay other creditors. However, Calpine now projects $500 million to $1.4 billion of excess liquidity for 2002. As it finalizes non-core asset sales and the economy picks up, S&P sees sentiment for shares improving. At under seven times S&P's 2002 EPS estimate of $1.65, Calpine shares are very cheap.

Comverse Technology (CMVT ): Maintains 3 STARS (hold)

Analyst: Ari Bensinger

Before special charges, January quarter EPS was $0.06 vs. $0.41, in line with lowered guidance. Sales fell 23% in a weak telecom-spending environment. Decelerating wireless subscriber growth is lessening demand for the core voice mail services. Comverse's balance sheet is solid, and has over $1.4 billion in cash. The companby sees lower sequential sales and a loss per share in the April quarter. The news is disappointing as S&P had projected the January quarter as the sales bottom. Comverse expects to profit by the end of the fiscal year. Despite difficulties now, long-term growth prospects are solid, and S&P sees enhanced services as the key to increasing carrier profitability.

Microsemi Corp. (MSCC ): Downgrades to 1 STAR (sell) from 2 STARS (avoid)

Analyst: Michael Santicchia

The company is going through a period of uncertain business restructuring, and S&P does not see its main business strategy of shifting toward high-margin products having a meaningful impact any time soon. Although the stock is down 50% in 2002, it will be under further pressure due to still high valuation multiples and general pressure on semiconductor peers. To justify the current price, the company should grow free cash flows at a rate of 50% per year for the next five years.

Computer Associates (CA ): Maintains 3 STARS (hold)

Analyst: Jonathan Rudy

Shares are down on investor concerns over a $500 millin offering, which includes the option for an additional $100 million offering. Computer Associates expects to use a portion of the proceeds to purchase call spread repurchase options on common stock to limit its exposure to a potential dilution. S&P sees this as a necessary move to alleviate prior short-term liquidity concerns. The company has paid down $400 million of debt in 2002 and should generate over $1 billion in operating cash flow in fiscal 2002 (March). With solid operating cash flow and with shares trading at a discount 2.5 times sales, S&P would hold Computer Associates.

Albertson's (ABS ): Upgrading to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Joseph Agnese

The grocery chain posted January quarter EPS of $0.60 before one time items, vs. $0.54 -- $0.05 ahead of S&P's estimate. Sales rose 1.2%, less than expected, reflecting a tough environment. Margins widened more than expected via headcount reductions and a store-level cost reduction program. S&P says restructuring is on track as 80 of 165 planned store closings are completed. Albertson's also announced a plan to exit four markets, resulting in about $580 million in charges. Based on S&P's discounted cash flow model and better than expected results from restructuring, S&P says shares are attractive.

TRW Inc. (TRW ): Maintains 3 STARS (hold)

Analyst: Efraim Levy

TRW's board again rejected a buyout bid from Northrop Grumman, citing the inadequacy of a $47 per TRW share offer. Management would likely set a low- to mid-$50s offer as the minimum. TRW is considering a spin-off of its automotive business, but also is entertaining various third-party offers to purchase the entire company or individual parts of it, or to make equity investments in the company. The high TRW debt and low valuations for automotive operations limit the upside, but the improving economic outlook is positive. TRW is hosting a morning conference call.

Mentor Graphics (MENT ): Maintains 4 STARS (accumulate)

Analyst: Robert Tortoriello

The maker of electronic design automation systems is in a pact to acquire Ikos Systems for $11 per share cash, or about $102 million. The deal will strengthen Mentor's hardware emulation product line, which is used to rapidly verify chip design functionality. It also provides Mentor with an emulation sales organization in U.S., where it currently does not market emulation products. S&P thinks the merger will improve Mentor's position against larger competitors. S&P also views shares as attractive with a price-earning-to-earnings-growth (PEG) ratio of 1.0, versus a PEG ratio of 1.6 for the S&P 500.

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