S&P Upgrades UAL to Avoid

UAL Corp. (UAL ): Upgrades to 2 STARS (avoid) from 1 STAR (sell)

Analyst: James Corridore

On Friday the company said it reached an agreement with its pilots on wage concessions, clearing a major hurdle on the road to recovery. Details are not announced, but UAL is likely to be getting major wage relief. Pay cuts from other labor groups now are more likely, which would clear the way for a $900 million loan guarantee from the federal government. S&P feels UAL has major operational difficulties ahead, but pay cuts and a loan guarantee would sharply reduce the likelihood of bankruptcy. Given large losses, poor industry fundamentals, and management turmoil, shares are not attractive despite the good news.

Noven Pharmaceuticals (NOVN ): Upgrades to 4 STARS (accumulate) from 4 STARS (accumulate)

Analyst: Herman Saftlas

The company has arguably the best-in-class transdermal drug delivery technology. Key products include Vivelle, Estradot estrogen, and CombiPatch estrogen/ progestin patches marketed through deals with Novartis. Noven has about 35% of the $265 million U.S. estrogen patch market. The company hopes to soon file an new drug application for its MethyPatch patch for ADHD. The CombiPatch could benefit from a recent small study showing the patch improved female sexual response. S&P is raising the 2002 earnings per share to $0.54, and sees $0.80 in 2003. EPS growing rapidly, but valuation is rich vs. the specialty drug group.

Dreyers Grand Ice Cream (DRYR ): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Richard Joy

Shares are up 57% as the company agreed to merge with U.S. ice cream business of Nestle' SA. Dreyet will issue 55 million new shares for Nestle's novelties and Haagen-Daz businesses, giving Nestle a 67% share of the combined company. Dreyer shareholders will receive the right to put shares to Nestle for $83 in 2006. S&P sees substantial cost and revenue synergies, and competitive advantages for the combined companies. Shares remain attractive given the strong growth outlook for the combined entity, but S&P sees the upside capped by an implied 6% annual return embedded in the put option thru 2006.

McDonald's (MCD ): Maintains 2 STARS (avoid)

Analyst: Dennis Milton

The company projected second quarter earnings per share at $0.38 to $0.39, ahead of last year's $0.35, excluding charges, and S&P's estimate of $0.35. The company improved margins and benefited from a weaker dollar, but system-wide sales for April and May grew only 1%, year to year, despite a rebound in Europe from fears of Mad Cow disease in 2001. S&P is raising the second quarter and full year EPS estimates to $0.38 and $1.50, and is awaiting more details. At 20 times S&P's 2002 EPS estimate, shares trade at a premium to peers, despite limited growth prospects.

Office Depot (ODP ): Maintains 4 STARS (accumulate)

Analyst: Tuna Amobi

At Credit Suisse First Boston's Retail & Apparel Conference, the CEO affirmed 2002 EPS guidance of $1.02-$1.03, up 30% from 2001. International and e-commerce segments should drive growth, but S&P sees margin and comps gains in the North America retail and delivery businesses, on a more streamlined structure and smaller stores. S&P estimates about $350 million in free cash flow and $1.03 earnings per share in 2002. With 15% expected long-term EPS growth, and shares trading at 18 times S&P's 2002 estimate, versus 19 times for the S&P 500, the stock merits accumulation.

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