Upgrading Dynegy

Also: Analysts' opinions on Starbucks, Toys R Us and Computer Associates

Dynegy (DYN ): Upgraded to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Craig Shere

The shares are higher in the wake of a press report mentioning the company's potential asset divestitures. The article says nothing new, but the market response indicates that the beleaguered shares may be near bottom. We at S&P see Dynegy finalizing the MLP IPO of its mid-stream gas assets in June, and announcing deals to de-consolidate NNG pipeline and/or Illinova electric distribution utility in the second half. At under 5 times our recently lowered 2003 EPS estimate of $1.80, Dynegy's forward p-e is the cheapest in our coverage universe. However, the strong rebound is still mitigated by the likelihood of a debt ratings downgrade to junk status.

Starbucks (SBUX ): Downgraded to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Dennis Milton

Although the company continues to post impressive same-store sales growth (8% in April), versus relatively weak year-ago comparisons, we believe it will have difficulty sustaining sales momentum into calendar 2003. The shares may come under pressure as investors focus on the coffee chain's declining long-term growth rate and the dilutive effect of stock options. While Starbucks has a strong balance sheet and good growth prospects, we believe the shares, trading at 36 times our fiscal 2003 (ending September) EPS estimate of $0.67, overstate the company's long-term growth potential. S&P would avoid the shares.

Toys "R" Us (TOY ): Upgraded to 3 STARS (hold) from 2 STARS (avoid)

Analyst: William Donald

The retailer posted a Q1 loss per share of $0.02, vs a $0.09 loss. Wall Street had expected a $0.05 loss. Sales increased 2% as buyers held back, awaiting video price cuts. The company is on track to complete its U.S. store revamp by the start of the 2002 holiday season. We expect consolidated full year fiscal 2003 (ending January) sales to rise 4.5%. We see EBITDA margin at 9.9% vs. 6.0%. And we expect $1.16 full year EPS for fiscal 2003. The company said it is comfortable with the $1.14 Wall Street consensus estimate. At 15 times expected fiscal 2003 EPS and 12 times the $1.45 fiscal 2004 estimate, The company's p-e ratios are toward the low end of its five-year range -- and at the bottom of its peer group. The stock is a likely market performer in the near term.

Computer Associates (CA ): Still 3 STARS (hold)

Analyst: Jonathan Rudy

An article in the May 20 Wall Street Journal updates a probe of CA by the Justice Department and SEC. The investigation is trying to determine whether CA wrongly booked over $500 million in revenue in fiscal 1998 (ended March) and fiscal 1999. While the news is disconcerting, with CA's fiscal year 2001 move to a more conservative ratable business model, and the recent appointments of two new independent directors, including the former SEC chief accountant, CA is making progress toward rebuilding credibility. At a discount to peers, with solid cash from operations and improving execution, we would hold CA.

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