S&P Cuts Biomet to 'Accumulate'

Biomet (BMET ): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Robert Gold

Shares are down after the maker of musculoskeletal medical products posted fiscal 2002 (May) Q3 operating EPS growth of 15%, to $0.23, a penny below S&P's forecast. Revenues were in-line with estimates, rising 15% on a foreign exchange-neutral basis (14% after foreign exchange), and up 16% excluding discontinued products. The drivers continue to be reconstructive knee and hip implants, dental implants, spinal fixation and arthroscopy products. Gross margins rose fractionally to 72%, but the shortfall was due largely to higher selling, general and administrative costs as Biomet continues to build its direct salesforce in Japan, and expand its European salesforce. There's some weakness in internal fixation. Should that persist, S&P could see gross margin pressures, while the SG&A ratio stabilizes. For now, S&P is leaving the fourth quarter sales estimate at $328 million, but is trimming the EPS estimate by $0.01 to $0.25. S&P feels the selloff is overdone, but reduced EPS visibility may limit extent of a rebound. S&P is also lowering the 12-month target to $30 from $34.

Johnson & Johnson (JNJ ): Maintains 5 STARS (buy)

Analyst: Herman Saftlas

The company agreed to acquire Tibotec-Virco NV for $320 million, providing access to advanced R&D in virology and AIDS -- and includes a promising next generation reverse transcriptase inhibitor for HIV. The purchase will result in a $0.05 second quarter writeoff for in-process R&D. S&P expects EU approval for J&J's breakthrough Cypher drug-coated coronary stent next month, with a U.S. launch likely in early 2003. J&J should be the dominant player in a projected multi-billion dollar drug-eluting stent market. Shares still are valued at a 20% discount to its intrinsic value based on S&P's discounted cash flow model.

Mcdonald's Corp. (MCD ): Reiterates 3 STARS (hold)

Analyst: Dennis Milton

The company expects first quarter EPS of $0.29-$0.30, vs. $0.29, and full 2002 EPS at the low end of prior guidance of $1.47-$1.54 in constant currencies. McDonald's reported strong European sales, sluggishness in U.S. and weakness in Asia. The estimates exclude charges and accounting changes. The company in 2002 expects a $0.02 benefit from a change in goodwill accounting, and $0.11 in charges to write down assets and goodwill. S&P is trimming the Q1 estimate to $0.30 from $0.31, and trimming the 2002 estimate to $1.49 from $1.50, excluding only charges. At 19 times the 2002 estimate, McDonald's is fully valued.

KB Home (KBH ): Downgrades to 3 STARS (hold) from 5 STARS (buy)

Analyst: Michael Jaffe

The company posted February quarter earnings per share of $0.95 vs. $0.70, beating all forecasts. The 11% increase in home deliveries, operating efficiencies, and higher mortgage banking income outweighed 22% more shares. S&P is hiking the fiscal 2002 (Nov.) earnings per share estimate to $5.70 from $5.60, and upping fiscal 2003's to $5.90 from $5.80. While the mortgage rate bottom has likely been seen, S&P thinks a moderate economic recovery will limit the rate upturn, and should leave KB Home's results in decent shape. But despite these positives, and a modest valuation at only seven times S&P's fiscal 2002 estimate, S&P think worries about the interest rate outlook will reduce investors' enthusiasm for shares.

Palm (PALM ): Maintains 3 STARS (hold)

Analyst: Megan Graham Hackett

The maker of handheld devices posted a February quarter pro forma operating loss of $0.02 vs. $0.02 earnings per share, beating the Street's mean of a $0.04 loss estimate. Revenue of $296 million -- down 38% -- was above guidance of $250 million to $260 million, on the strength of new products. Gross margin was 29% vs. S&P's estimate at 28%. However, most of the upside came from expense cuts. Palm sees fourth quarter revenue of $290 million to $300 million, a bit higher than S&P's estimate. The company believes revenue growth can reach 20% in fiscal 2003. S&P now sees a fiscal 2002 (May) loss of $0.17 per share vs. the prior loss of $0.19 per share. S&P still sees fiscal 2003's EPS of $0.10. Challenges remain, but at 24 times S&P's calendar 2003 $0.13 EPS estimate -- below peers, Palm is O.K. to hold.

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