S&P Lowers Chip Equipment Stocks

Applied Materials (AMAT ), Credence (CMOS ), Rudolph (RTEC ): Downgrades to 2 STARS (avoid) from 3 STARS (hold);

Brooks-PRI (BRKS ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Initial second quarter earnings reports from top chip equipment makers indicate a marked slowdown in order growth in the second half of the year. This has been confirmed by weak reports from Intel and expectations of much slower second half growth at Taiwan foundries -- the mainstay of the current recovery. With valuations of many stocks in the group still well above their historical troughs, S&P continues to see some as over-valued.

Baxter International (BAX ): Reiterates 4 STARS (accumulate)

Analyst: Robert Gold

Baxter maintains its full year sales growth expectation of sales in the low-teens range, and sees a mid-teens earnings per share gain before charges. The maker of intravenous solutions and other medical products expects that sustained growth in its recombinate Factor VIII, and contributions from its acquisition of Fusion Medical, will join with better performance in drug delivery. S&P thinks the harsh selloff in the stock on Thursday reflects broader concerns regarding the drug sector, and says the revenue shortfall is quite unusual for Baxter. But, Baxter's historically low valuation of 19 times S&P's 2002 "core" EPS estimate of $1.75, which is 17 times S&P's operating estimate of $1.93, is compelling.

Sears (S ): Reiterates 5 STARS (buy)

Analyst: Karen Sack

Sears' operating income showed strong gains in the second quarter, and earnings per share of $1.31 vs. a loss of $0.60 beat expectations. S&P has raised its EPS estimate for 2002 by $0.20 to to reflect strong performance in the first half. Operating margins at the company's retail and related services division rose 40% in spite of weak apparel sales and disruptions from a store remodeling program.

Also, credit card operations should continue to be strong with the popularity of a new Sears Gold MasterCard. With Sears on an EPS growth track for the next few years, shares are undervalued at 8.5 times the 12-month target of $68.

Allstate (ALL ): Upgrades to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Catherine Seifert

Allstate reported better than expected $0.64 vs. $0.31 second quarter operating earnings per share. Current quarter EPS is after $0.03 of restructuring charges. S&P is encouraged by the 5.5% written premium growth, and a 6.3% rise in Allstate's core standard auto line. Underwriting also improved, and the combined ratio equaled 100.4% vs. 106.3%.

S&P is raising its 2002 operating EPS estimate $0.20 to $2.80 per Allstate's guidance, and is upping 2003's by $0.15 to $3.15. S&P thinks Allstate is a good value play with decent growth prospects that aren't contingent on an equity market recovery. The six-month to 12-month target is $42-$44.

AOL Time Warner (AOL ): Downgrades to 2 STARS (avoid) from 4 STARS (accumulate)

Analyst: Thomas Graves

The downgrade reflects S&P's view that the company has a long way to go to restore investor confidence. S&P doesn't view the dollar amount of the accounting issues, as discussed in Thursday's Washington Post , as especially onerous, but S&P does see an increased cloud over AOL, including concerns about adequate disclosure and the health of the AOL division.

Also, under S&P Core Earnings, additional expensing of options would have cost AOL about $0.31 of earnings per share in 2001. AOL has some attractive assets, but S&P doesn't advise bottom-fishing for value.

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