Still Sell Schering-Plough

Schering-Plough (SGP ): Still 1 STAR (sell)

Analysts: Herman Saftlas, Frank DiLorenzo

The company reached an agreement with the U.S. Food & Drug Administration on a consent decree to resolve manufacturing problems. Schering-Plough will pay $500 million in fines to the government, as expected, but potential penalties for not meeting deadlines could result in more downside. The company is lowering its 2002 EPS growth estimate to single-digits, from low double-digits, partly on sporadic product shipments and lower margins. An ongoing criminal investigation continues to cloud the situation. We at Standard & Poors would avoid the shares, based on minimal or negative EPS growth in 2002 and 2003, and the still-high risk of regulatory and criminal action.

Affiliated Computer Services (ACS ): Keeping 4 STARS (accumulate)

Analyst: Richard Stice

The company agreed to acquire AFSA Data Corp., the primary student loan service provider, for $410 million. The deal will increase Affiliated's business process outsourcing revenues to 67% of the overall total. The company expects the transaction to add $100 million to fiscal 2003 (ending June) sales and $0.07 to EPS. We are keeping our fiscal 2002 EPS estimate at $1.77, and are raising our fiscal 2003 forecast by $0.05, to $2.20. Given favorable growth prospects, and with the stock trading at a discount to Affiliated's peers on both a p-e and price-to-sales basis, the shares are attractive.

Citigroup (C ): Upgraded to 5 STARS (buy) from 3 STARS (hold)

Analyst: Stephen Biggar

We at Standard & Poor's believe the shares are at an attractive entry point after their recent decline. We think recent news about the adequacy of loss reserves is overblown, and does not factor in the size of related portfolios. Visibility issues related to the spin-off of Citigroup's Travelers unit and investment of proceeds should wane. The shares are trading at 14 times our 2002 EPS estimate of $3.25 -- a sizeable discount to the stock's historical valuation. We expect the stock to return to a high-teens multiple as the market recognizes that Citigroup's continued ability to maintain earnings momentum provides a basis for a mid-$50's target price.

Dell (DELL ): Still 3 STARS (hold)

Analyst: Megan Graham-Hackett

April quarter EPS of $0.17 vs. $0.17 one year earlier was $0.01 ahead of expectations. Dell's EPS quality was solid. The company generated $600 million in cash flow from operations and upside on revenue at $8.06 billion, above our estimate of $7.8 billion. Desktop revenue was off 5% from the preceding quarter, while enterprise was up 6%. Gross margin was light at 17% vs. 18% as higher component costs outweighed expense cuts. Dell says its U.S. corporate business is stable, with signs of improvement. It sees July quarter revenue up 2% from the April quarter, and $0.18 EPS. We are upping our fiscal 2003 (ending January) EPS estimate by $0.01, to $0.78. Dell's current p-e multiple of 36 places it above its peers, but the low-cost PC producer is worth holding.

Kulicke & Soffa (KLIC ): Reiterates 5 STARS (buy)

Analyst: Richard Tortoriello

In its mid-quarter update, the company says it expects to hit the low end of the $130-$140 million June quarter sales range. There has been some slowing in orders as assembly purchases have gotten ahead of front-end capacity. Also, the shift to leading-edge Maxum product slower than expected, on cost issues. We note, though, that the company's guidance still represents a 20%-plus sales rise from the March quarter. Also, Applied Materials' 54% quarter-to-quarter order surge means the front-end is rapidly building capacity; the back end will have to follow. At 1X our calendar 2003 sales estimate, well below its 3X historical peaks, the stock is attractive.

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

Analyst: Scott Kessler

AOL said yesterday at its annual meeting that it is committed to building value. New CEO Richard Parsons offered five priorities: revitalize the AOL unit, restore investor confidence, guard balance sheet integrity, simplify corporate structure, and re-energize employees. We believe the market's focus has been too much on the woes of AOL unit's ad business, and not enough on its strong cable, movie, publishing and music businesses. We also expect AOL to take actions to simplify cable-system ownership structure. With enterprise value/EBITDA attractive at 11.6, AOL is a nice value.

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