S&P Cuts Airlines

Delta Airlines (DAL ) and AMR Corp. (AMR ): Downgrades to 2 STARS (avoid) from 3 STARS (hold), and Alaska Air (ALK ) to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: James Corridore

In an 8-K filing, Delta says third-quarter revenues are likely to be flat with a year ago's, even though last year included September 11 and a sharp revenue drop thereafter. The company see a third-quarter operating loss of about $225 million, which equates to about a $1.82 loss per share compared with the Street's current consensus of $1.50. S&P feels Delta will not be alone in this environment, and is downgrading Alaska Air and AMR, which is the parent company of American Airlines. The sheer size of industry losses are likely to further weaken strained balance sheets.

P.F. Chang's China Bistro (PFCB ): Upgrades to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Marcos Kaminis

The rollout of the Pei Wei concept is underway. Once a threshold operating level is reached, which is seen in 2004, S&P expects the new fast-food format to boost growth at a rate similar to the Bistro format. P.F. Chang's is valued at 29 times the $1.04 earnings per share that S&P sees in 2003, consistent with the forecast of 30% earnings per share growth over the next three to five years. S&P's valuation of free cash flow implies an intrinsic value of $36 in the nine months going forward. With exceptional growth and solid relative valuation, P.F. Chang's should outperform the market over the next 12 months.

Citigroup (C ): Maintains 5 STARS (buy)

Analyst: Stephen Biggar

The financial services company is rumored to be in talks to settle conflict of interest charges related to dealings of its corporate and investment banking units. The amount could reach a few hundred million dollars. A settlement would likely include the complete separation of two functions in what could be a major revamp for the securities industry. Citigroup earlier this week settled with the NASD over charges of issuing overly optimistic research. With regulatory clouds lifting and a substantially depressed valuation, S&P sees the shares outperforming in the year ahead.

The Children's Place (PLCE ): Downgrades to 2 STARS (avoid) from 4 STARS (accumulate)

Analyst: Mark Basham

Shares opened down sharply as the company reported September same-store sales down 30%, leading to a breakeven third quarter. This is not just a "bad weather" or "weak consumer" story. The company's merchandising strategy is failing. S&P believes that to correct this problem, changes will have to made at the managerial and executive levels. S&P has placed its =estimates under review for a sizable reduction.

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