Still Sell Lilly

Also: Analysts' opinions on Citigroup, Bank of America, and AOL Time Warner

Eli Lilly (LLY ): Reiterates 1 STAR (sell)

Analyst: Herman Saftlas

Lilly's first quarter EPS fell 22% to $0.58, in line with the consensus estimate. A sales decline of 9% was worse than expected. Gross margins narrowed to 79.3%, from 81.4%. The drugmaker's results were hurt by a 70% drop in Prozac sales. Sales of Humulin and Reopro were also lower. But sales growth was posted in newer drugs such as Zyprexa (+29%), Evista (+19%), and Gemzar (+14%). The product pipeline remains promising, but new approvals subject to resolution of manufacturing issues. Also, Zyprexa is likely to be contraindicated for diabetics in Japan. Lilly is still overvalued vs. its peers on price-to-sales and p-e basis -- and the valuation gap is not sustainable.

Citigroup (C ): Keeping 3 STARS (hold)

Analyst: Stephen Biggar

The financial services giant posted first quarter EPS of $0.74 vs. $0.71, below Street expectations. A below-normal 5% revenue gain, a $519 million charge for Argentina loan write-downs, and loss reserve additions led to a weak quarter. S&P sees the corporate segment under pressure from a weak equity market environment and credit quality deterioration. The likelihood of higher interest rates by the end of the year will halt margin expansion seen recently in the company's consumer business lines. We are lowering our 2002 EPS estimate by $0.05, to $3.25, after the weak first quarter. We do not see much p-e expansion, given weak industry conditions.

Bank of America (BAC ): Still 4 STARS (accumulate)

Analyst: Stephen Biggar

The company reported first quarter EPS of $1.38 vs. $1.15, above analysts' expectations. The quarter helped by strong mortgage banking activity and margin improvement spurred by lower a interest rate environment. Overall revenue growth was light at 2% due to lower trading activity and investment gains. The company's diversity of earnings and wide geographic footprint still prove key to maintaining EPS momentum given prevailing economic conditions. S&P still sees 2002 EPS at $5.60. The shares are trading at a discount to the company's peer group at under 13 times our 2002 EPS estimate.

AOL Time Warner (AOL ): Reiterates 4 STARS (accumulate)

Analyst: Scott Kessler

An article in this weekend's edition of Barron's included bullish comments on AOL from a hedge-fund manager that had been short its stock. Although this manager turned positive on AOL a few months ago, we at S&P believe his logic is sound. In fact, last week we articulated similar themes about opportunities with the shares: the relative valuation is attractive and large-block panic selling is indicative of a bottom.. Although the company's fundamentals aren't great, our conservative intrinsic value estimate using cash flow analysis indicates a target price of $30-$35.

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