Still Hold H-P

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

Analyst: Megan Graham Hackett

At an analyst meeting, the company now sees second half fiscal 2002 (Oct.) revenues down sequentially, vs. the prior 2-3% gain. S&P had conservative revenue expectations, and is trimming the August and October quarter's earnings per share estimate by a penny each. The company sees 4% to 6% revenue growth in fiscal 2003, and 7% to 9% growth (vs. the prior 8% to 10% growth) in fiscal 2004. However, H-P sees cost synergies of $2.5 billion achieved one year earlier. Currently, H-P still says consumer sales are weak and enterprise sales are murky. S&P is keeping the fiscal 2003 EPS estimate of $1.38, and sees fiscal 2004 at $1.67. At a price-sales ratio below one, the stock is fairly valued given the larger risks to revenues, and vs. peer valuations.

United Natural Foods (UNFI ): Maintains 4 STARS (accumulate)

Analyst: Joseph Agnese

The company posted April quarter earnings per share of $0.29 vs. $0.14, a penny above S&P's estimate. Sales rose 16%, driven by super natural and mass market distribution channels. The startup of a new distribution center in southern California should boost efficiencies and market penetration. Resulting margin benefits should offset lower-margin purchases by larger customers. S&P is keeping the fiscal 2003 (July) EPS estimate of $1.33 to reflect the expansion of distribution centers and the growth of the natural products industry. At a P/E-to-growth ratio of 0.9, United Natural is undervalued compared to peers.

Flextronics International (FLEX ): Downgrading to 4 STARS (accumulate) from 5 STARS (buy)#

Analyst: Richard Stice

At a mid-quarter update, Flextronics says June quarter and September quarter revenue and earnings per share will be below the Street and S&P's estimates. The company cited ongoing end-market weakness and higher operating expenses associated with a more aggressive transition to lower cost production facilities. It will take a $150 million restructuring charge in the June quarter. S&P is lowering its fiscal year 2003 (March) EPS estimate by $0.25, to $0.40. Although the shares are trading at a discount to peers on price-earnings, P/E-to-growth and price-to-sales basis, poor near-term prospects temper S&P's enthusiasm.

Nortel Networks (NT ): Still 3 STARS (hold)

Analyst: Ari Bensinger

The company aims to raise $800 million via the issuance of convertible equity units and 150 million common shares. The equity units are expected to carry 7%-7.5% dividend, and be convertible at a 18%-22% premium in a three-year period. As of the end of the first quarter, total available liquidity stood at $6.6 billion, including $3.1 billion in cash. Nortel burned through roughly $900 million in cash in the March quarter. S&P sees a lower cash burn rate going forward as operating losses decrease and restructuring projects wind down. S&P also views the offerings positively, as they add a liquidity cushion without over-diluting the stock.

Walgreen (WAG ): Continue 4 STARS (accumulate)

Analyst: Joseph Agnese

The drug store chain reported May sales up 17.4%, in line with our expectations. Comparable-store sales rose 11.4%. Pharmacy continues to drive growth with comparable sales rising 16.0%, accounting for 62% of May sales. Front-end sales increased 4.8%. S&P expects margins to continue being pressured by increased third party business, a change in product mix to lower margin pharmacy items, and an increased promotional environment. With shares trading at 31 times S&P's fiscal year 2003 (August) earnings per share estimate of $1.18, S&P thinks this clear industry leader should benefit from long-term earnings consistency.

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