S&P Upgrades GTECH Holdings to Buy

Also: analysts' opinions on Siebel Systems, Microsoft, Eli Lilly and Dell

GTECH Holdings (GTK ): Upgrades to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Thomas Graves

S&P is raising the fiscal 2003 (Feb.) EPS estimate to $3.40, from $3.20, as results were helped by wider gross margin on service revenues. S&P sees $3.70 for fiscal 2004. This assumes conversion of low-cost debt into the stock during the year. S&P views GTECH as an attractive cash-flow story with the stock at a modest price to earnings multiple. Over time, S&P expects the company to benefit if countries and states look more to lotteries for revenue. Increasingly, S&P sees the stock's appeal enhanced by the prospect of adding much more financial or commercial transaction business in the next five years.

Siebel Systems (SEBL ): Maintains 5 STARS (buy)

Analyst: Jonathan Rudy

A Wall Street Journal article questions the rise in Siebel's swap deals with suppliers in 2001. The total amount is $76 million, about 7% of 2001 license sales. While the practice should be monitored, Siebel is one of the few software companies that break out this figure in an attempt to be transparent. Siebel also reports results on a GAAP basis, avoiding pro-forma controversy. The article fails to mention Siebel's 35% increase in cash from operations and improving profitability -- despite the difficult environment. With solid profitability and a strong balance sheet, S&P says still buy the customer relationship management software leader.

Eli Lilly (LLY ): Downgrades to 1 STAR (sell) from 3 STARS (hold)

Analyst: Herman Saftlas, Robert Gold

S&P believes the shares of this drug maker will be challenged as overall pharmaceutical valuations compress. For Lilly, there are several specific fundamental concerns, including accelerating generic Prozac sales and manufacturing issues with FDA that could delay the launch of new products. Assuming a strong second half, S&P sees 2002 earnings per share about flat from a year earlier, but visibility is low. Despite headwinds, Lilly is priced at about seven times 2002 sales, and 28 times EPS. This represent premiums to the drug group of 75% and 22%, respectively. S&P believes this valuation gap is not sustainable.

Microsoft (MSFT ): Reiterates 4 STARS (accumulate)

Analyst: Jonathan Rudy

President and COO Rick Belluzzo will to step down in May. Business units will report directly to CEO Steve Ballmer. Belluzzo had been with Microsoft since late 1999, and became President in early 2001. With a relatively brief tenure at the company and Belluzzo's background primarily in hardware before joining Microsoft, S&P wonders just how extensive his impact has been. Despite succession questions now, Microsoft is still Chairman Bill Gates' and CEO Ballmer's company, and S&P believes that getting Ballmer more directly involved in daily operations will be net positive.

Dell Computer (DELL ): Maintains 3 STARS (hold)

Analyst: Megan Graham Hackett

Nothing surprising as the company confirmed the same themes for future growth at Thursday's analysts meeting that it has discussed in the past two years. Dell believes it can double revenues over the next four to five years as it grows its enterprise business to 50% of total business and expands internationally. Dell thinks it can drive toward a 10% operating margin by cost efficiencies in supply chain management and procurement.. The company added $200 million to its April quarter revenue guidance on strength in U.S. markets for all products. The information is positive, but it's not changing S&P's fiscal 2002 (Jan.) EPS estimate of $0.77. At 35 times, above peers, S&P says hold Dell.

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