Still Accumulate Microsoft

Microsoft (MSFT ): Maintains 4 STARS (accumulate)

Analyst: Jonathan Rudy Microsoft announced it will lower the price of its X-Box in the U.K. and continental Europe. Despite intense competition in new hardware consoles, X-Box had been priced at a premium to PlayStation 2 in Europe and Japan. This cut puts X-Box on par with PlayStation 2 in Europe. S&P believes that price reduction will also be necessary in Japan, with U.S. price cuts not far away. The moves should benefit Microsoft's video game software and will also benefit software providers Electronic Arts and THQ.

Honeywell (HON ) : Maintains 3 STARS (hold)

Analyst: Robert Friedman

First quarter core earnings per share of Aircraft components/climate controls/industrial materials rose 7.4 times, to $0.42, mostly on the absence of big first quarter 2001 restructuring charges. Otherwise first quarter operating income fell 20%, mostly on poor results in Honeywell's flagship aircraft components/servicing operations. The ailing global airline industry, weak economy, and prior management snafus are the primary culprits in poor performance. The company has a history of 20%+ return on equity and decent free cash earnings, but cash flow models indicate Honeywell is trading at the highest end of the $28-$38 per share estimate.

McDonald's (MCD ): Downgrages to 2 STARS (avoid) from 3 STARS (hold)

Analyst: D. Milton

The global fast food restuarant operator posted March quarter earnings per share of $0.31, before impairment charges, up from $0.29. Improved earnings are due to a change in goodwill accounting, reduced interest costs, and share repurchases. System wide sales increased fractionally, while operating earnings dropped. Although McDonald's beat S&P's March quarter estimate of $0.30, S&P still is lowering its 2002 EPS estimate to $1.47 from $1.49, and expects the company's stagnating sales to continue pressuring margins. At 20 times S&P's 2002 EPS estimate, the share price overstates McDonald's long-term growth prospects.

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

Analyst: Jonathan Rudy

The business software company posted first quarter earnings per share of $0.12 vs. $0.15, in line with estimates. Revenues were roughly flat sequentially and slightly below estimates. License revenue was down 1.7% sequentially. Siebel experienced strength in the financial, automotive, high tech and telecom industries. Operating margin widened to the 19% level, from a year ago's 18%, and the company expects further widening. Siebel continues to gain market share. Customer relationship management (CRM) software remains a high IT spending priority. However, S&P is trimming the 2002 EPS estimate to $0.56, from $0.60, and sees $0.70 in 2003. At the low end of a historical price to sales valuation, and momentum with the Siebel 7 upgrade, S&P says buy this CRM leader.

IBM Corp. (IBM ): Reiterates 4 STARS (accumulate)

Analyst: Megan Graham Hackett

The computer giant posted first quarter EPS of $0.68 vs $0.98, in line with preannounced guidance, with solid EPS quality. Pension income is down $75 million -- offset by the elimination of goodwill amortization. Revenues fell 12% to $18.6 billion, with a hit from hardware heavier than S&P expected. Hardware fell 25%, and was especially weak in mainframe, servers, and technology for original equipment manufacturers. Services were off 3%, but had an impressive $15 billion in new signings, which bodes well for the third and fourth quarters. IBM expects to meet the 2002 Street mean of $4.16. S&P is keeping the $4 estimate. At 16 times S&P's 2003 estimate of $5.16, with valuation below peers, IBM is attractive.

Advanced Micro Devices (AMD ): Maintains 3 STARS (hold)

Analyst: Thomas Smith

The company posted a first quarter $0.03 loss vs. $0.37 EPS, beating the Street by $0.03. Revenue dropped 24% year over year and 5% quarter over quarter. S&P thinks this is good performance in tough times. Advanced Micro showed record microprocessor unit sales despite a price war and softer PC demand. The company huides for flat to 10% lower June quarter revenue. The New Hammer family of chips, an improved plant, and better seasonality should bring profitability in the second half of 2002. S&P is reducing the 2002 estimate to $0.10 EPS, from $0.20, and cutting the 2003 estimate to $0.70, from $0.75. Advanced Micro trades at 1.4 times the tangible book value, and 21 times S&P's 2003 estimates, which is modest valuation vs. peers.

EMC Corp. (EMC ): Maintains 3 STARS (hold)

Analyst: Richard Stice

The company's first quarter adjusted loss per share of $0.04, vs. EPS of $0.18, was in line with S&P's estimate. Revenues declined 14% from the fourth quarter on lack of IT spending and on seasonality. Gross margin narrowed sequentially as lower volumes outweighed fixed cost reductions. Expense cutting initiatives were achieved ahead of schedule. EMC still expects to be profitable in the second half of 2002. S&P is keeping the 2002 loss per share estimate at $0.01. While results are beginning to improve, given the lack of visibility and tepid demand environment, S&P would not add to positions at this time.

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