Downgrading Comverse Technology

Also: Analysts' opinions on Lands' End, Toys R Us, Eastman Kodak, Lucent, and H.J. Heinz

Comverse Technology (CMVT ): Downgrading to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Ari Bensinger

Yesterday the company presented at a major telecom tech conference. The tone was downbeat as wireless carriers are lowering spending and squeezing capacity out of existing network capacity. Long sales cycle is making visibility poor. The analyst sees the delay in 2.5/3G network launches postponing several new product growth opportunities. S&P now projects fiscal year 2003 (January) loss per share of $0.08 vs. prior $0.60 EPS estimate. He expects major restructuring actions, including workforce reductions, during the first fiscal quarter. At 3 times S&P's lowered fiscal year 2003 sales estimate, the stock is above its peers, so investors should avoid it.

Lands' End (LE ): Maintain 3 STARS (hold)

Analyst: Karen Sack

The catalog retailer posts a slightly weaker fourth quarter than expected. Earnings per share was $1.51 vs. $1.07 on a 0.6% rise in sales. The company ended fiscal year 2002 (January) with solid gross margin expansion and good expense controls. Full fiscal year 2002 EPS almost doubled to $2.23 against a weak fiscal year 2001. Higher initial markups and good inventory control boosted profitability. Internet sales rose 37% to $299 million, while international sales were also strong, rising 9%. S&P sees EPS rising almost 14% in fiscal year 2003 to $2.54, slightly above company guidance. But with the stock at 19 times the fiscal year 2003 estimate, S&P would not add to positions at this time.

Toys R Us (TOY ): Downgrading to 2 STARS (avoid) from 4 STARS (accumulate)

Analyst: William Donald

The toy retailer reported fiscal year 2002 (ending January) EPS of $0.94, as expected, vs. $1.23 before charges. After charges, EPS was $0.33. Sales were down 2.8%. TOY was hurt by the economy, effects of September 11, and $186 million of restructuring costs for job cuts, store closings and reformatting. Donald advises a stance of wait and see, as TOY grapples with fiercer competition amid major store overhauls. He is cutting his fiscal year 2003 EPS estimate to $1.11 from $1.26, largely on dilution from a planned equity issuance. TOY is fairly valued for now at 8 times estimated fiscal year 2003 free cash flow.

Eastman Kodak (EK ): Maintain 1 STAR (sell)

Analyst: Richard Stice

For the second time in less than three weeks, the company reiterated its expectation of $0.05-$0.15 first quarter EPS and full year 2002 EPS of $2.00-$2.60. However, S&P remains concerned with pricing pressures on the traditional film side and lack of near-term profitability in its digital business. Furthermore, despite the expected seasonal second quarter strength, S&P believes EK's projections are too aggressive. The recent departure of its president/COO in the midst of its new realignment efforts adds to uncertainty. Stice is keeping his 2002 EPS estimate at $2.05. Given the ongoing risks, he would place funds elsewhere.

Lucent Technologies (LU ): Maintain 3 STARS (hold)

Analyst: Ari Bensinger

The telecom gear maker raised $1.75 billion cash from a convertible preferred stock sale. The transaction comes on the heels of a highly-successful $1.9 billion convertible issue in August 2001. The issuance indicates the telecom industry recovery may take longer than anticipated. Operationally, the company is successfully improving working capital through aggressive inventory and accounts receivable management. Its restructuring plan remains on target. LU has $3.1 billion in cash and $1.5 billion available under a credit facility. The analyst believes the depressed shares, trading at roughly 1 times his 2002 sales estimate, reflect challenges ahead.

H.J. Heinz (HNZ ): Maintain 3 STARS (hold)

Analyst: Richard Joy

The food maker reported January-quarter EPS of $0.57, vs. $0.65 before special items, in line with expectations. Sales were up a strong 12.4%, primarily on acquisitions. Retail ketchup, frozen foods and convenience meals segments are performing well, while seafood and pet food remain challenging. Foodservice business is showing modest improvement. The analyst is keeping his fiscal year 2002 (April) EPS estimate at $2.40, but reducing fiscal year 2003 forecast by $0.05 to $2.60. At 16 times his calendar 2002 EPS estimate of $2.55, Joy views HNZ as fairly valued at a modest discount to its large-cap food peers.

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