Downgrading Abbott Labs

Also: Analysts' opinions on Microsoft, Applied Materials, and Hewlett-Packard

Abbott Laboratories (ABT ): Downgraded to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Herman Saftlas

The downgrade is based on a negative decision by the U.S. Food and Drug Administration. The FDA found that Abbott's Lake County diagnostic plant was not in conformity with quality systems regulations. The ruling is not likely to materially impact 2002 sales or EPS (excluding possible additional fines). But a lengthy plant closing could cause a loss of market share and hold up approval of new diagnostics. Abbott also faces uncertain FDA action on its Synthroid thyroid drug and D2E7 arthritis compound. The stock is likely to languish until the FDA issues are resolved. Abbott remains conservatively valued vs.its peers based on p-e and price-to-sales measures.

Microsoft (MSFT ): Reiterates 4 STARS (accumulate)

Analyst: Jonathan Rudy

The company lowered the price of its X-Box game console in the U.S. to $199, from $299. The reduction comes in response to a similar move by Sony on its PlayStation 2 on May 14. The price cuts were widely anticipated but happened earlier and were more aggressive than some had expected. While the cut will have some impact on Microsoft's revenues, it should have minimal impact on its EPS. Intense price competition over hardware consoles should benefit the company's more profitable video game software over the long term. S&P sees Electronic Arts and THQ Inc. as prime beneficiaries of the price cuts.

Applied Materials (AMAT ): Still 3 STARS (hold)

Analyst: Richard Tortoriello

The leading chip equipment maker's April quarter EPS was $0.03, vs. $0.21 one year earlier, $0.01 ahead of the Wall Street consensus forecast. Sales were down 46%, but up 16% from the January quarter. The big news was orders, up 54% from the prior quarter, to $1.7 billion. The book-to-bill ratio was 1.5 to 1. Strength continues to come from Asia, in particular foundries, with 39% of orders from Taiwan. DRAM manufacturers are also ordering (24% orders). Most of the orders were for 200mm equipment, but S&P expects sales of 300mm gear to pick up in the second half of 2002. However, at 27 times our fiscal 2003 (ending September) EPS estimate of $0.68 and 5 times our calendar 2003 sales forecast, the shares are fairly valued.

Hewlett-Packard (HPQ ): Still 3 STARS (hold)

Analyst: Megan Graham-Hackett

The company reported April quarter operating EPS of $0.25 vs. $0.17, in line with the Wall Street mean estimate. However, revenues, at $10.6 billion (down 9%), were below expectations of $11.1 billion. The revenue decline was offset by better than expected gross margin of 28.7% vs. 25.3%, aided by growth in supplies. Revenue declines were led by weakness in computing systems (because of stiff pricing and weak IT spending) and embedded/ personal systems. Printing & imaging sales were roughly flat. H-P left guidance for its June analyst meeting. At 15 times our fiscal 2003 (ending October) EPS estimate of $1.38, and with the company facing challenges to its profitability in the enterprise market and merger risks, they merit a hold rating.

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