Buy Long's Drug Stores

Long's Drug Stores (LDG ): Upgrades to 5 STARS (buy) from 2 STARS (avoid)

Analyst: Joseph Agnese

Although growth still is below peers, S&P believes shares will benefit from margin improvement on implementation of supply chain initiatives. The shift to centralized procurement should result in a $0.30-$0.40 EPS benefit by fiscal 2004 (Jan.), and $0.80-$1.05 by fiscal 2006. S&P expects an incremental earnings benefit throughout the year, reflecting an improving economy, and a reduction in excess inventory and increased turns. With expected margin benefits, S&P believes Long's is undervalued at 0.25 times 2002 sales -- well below the 0.75 times the peer group average.

Williams Cos (WMB ): Maintains 3 STARS (hold)

Analyst: Craig Shere

Shares are down Wednesday on a Wall Street Journal report of an SEC request for information back in early February. Williams tells S&P that it responded to the request from a regional SEC office and shortly thereafter the SEC informed Williams that they were satisfied. In many ways, the company's accounting is conservative. Williams is the only energy marketer not posting the notional value of trading as revenue. With debt commitments for the former telecom unit covered, S&P sees minimal chances of a future adverse surprise. With shares trading at a 0.66 price-earnings multiple to EPS growth rate, the stock's discount to market multiples comfortably reflects these uncertainties.

Dynegy (DYN ): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Craig Shere

Shares are down Wednesday on a Wall Street Journal article that questioned Dynegy's tax-advantaged gas supply contract. While the contract clearly exists, S&P is dubious of the article's use of draft documents and short sellers' evaluations. Dynegy tells S&P that the contract permitted initial below-market sales of gas to new customers to entice longer-term pacts during period of high gas prices. However, given the adverse press publicity, S&P sees a current premium valuation to the company's peer independent power producers in jeopardy -- based both on its price-earnings ratio and the price to operating cash flow, and also sees shares underperforming in the near term.

H&R Block (HRB ): Reiterates 5 STARS (buy)

Analyst: Michael Jaffe

H&R Block reported that for the current season through March 15, fees for tax preparation and related services rose more than 12% on 4% more clients and 9% higher average fees. H&R Block noted the importance of the last four weeks of the tax season, but current trends makes the company think it will meet fiscal 2002 EPS guidance of $2.20 to $2.30. S&P is maintaining its $2.30 fiscal 2002 EPS estimate, and is hiking the fiscal 2003 estimate to $2.65 from $2.58. With new tax laws and H&R Block's strong brand name likely to continue driving EPS gains, shares still are attractive at 17 times S&P's fiscal 2003 estimate.

P.F. Chang's China Bistro (PFCB ): Maintains 4 STARS (accumulate)

Analyst: Marcos Kaminis

The restaurant chain expects to exceed first quarter forecasts. Revenues rose 35%, beating the company's forecasted 28% estimates and S&P's estimated 27%. Comparable-store sales rose 3.4%, with 1% attributable to price increases. P.F. Chang's expects to exceed its previously guided and S&P's estimated $0.37 EPS for the first quarter. At 43 times S&P's $1.55 EPS estimate for 2002, shares are at a premium to the 30% projected growth. However, S&P is reviewing its estimate for an increase. Shares are trading at the low end of a target range of $66 to $71, but a revision upward is likely considering these strong results.

WorldCom (WCOM ) to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Thomas Rosenbluth

The company confirmed it is cutting its workforce, but only 6% of WorldCom Group, rather than the 10% reported Wednesday morning in The Wall Street Journal . The MCI group is not affected. S&P still believes that with the weakened long distance market, this action is likely the first of cost-cut steps, and see capital spending also being reduced -- limiting growth potential in an expected economic recovery. S&P is lowering its 2002 EPS estimate by $0.04 to $0.71, and trimming the 2003 estimate by $0.05 to $0.80. Shares are trading at eight times S&P's fiscal 2003 estimate -- slightly lower than peers. But given the expected cost-cut measures and invasive SEC investigation persisting, S&P would not add to positions at this time.

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