Accumulate Philip Morris

Philip Morris (MO ): Maintains 4 STARS (accumulate)


Philip Morris shares are trading lower on news of a $28 billion punitive damage award in an individual trial. S&P views the award as largely symbolic, with a likely reduction to the $50-$100 million range by judge. S&P doesnn't see any near-term financial impact, since the case will likely be in appellate courts for years. Litigation defenses remain strong, but West Coast cases remain an area of concern. Strong cash flows and a 7% dividend yield make shares attractive at 7.2 times the $5.00 earnings per share that S&P sees in in 2003 -- a sharp discount to the price-earningss ratio on the S&P 500.

ICN Pharmaceuticals (ICN ): Downgrades to 5 STARS (buy) from 3 STARS (hold)

Analyst: Herman Saftlas

While a new CEO is being sought, interim management is struggling with weakness in certain drug lines and high R&D expenses, $540 million of long-term debt, and uncertainty with respect to a previously announced restructuring program. In addition, the maintenance of the $0.31 annual dividend is uncertain as royalty payments from Schering-Plough now are going to 80%-owned Ribapharm, which is not obligated to remit the funds to ICN. Also, ICN will not receive any consideration if it spins off Ribapharm as planned.

Lab Corp. (LH ): Downgrades to 1 STAR (sell) from 3 STARS (hold)

Analyst: Phillip Seligman

The stock is lower after the provider of medical testing services announced third-quarter revenues of $650 million to $655 million, 16% above 2001 levels, but only 14.5% higher on a per-day basis -- 2% lower than Lab Corp. previously anticipated. That's due to a continued slowdown in routine testing volume growth, although the genomics business remains strong. The slowdown will result in third-quarter earnings per share of 10% below the Street's estimate of $0.49. The company also sees a slowdown continuing into the fourth quarter. Despite a compelling valuation of 18 times the 2002 estimate of $1.86, vs. 20%-plus long-term growth, Lab Corp. will unlikely revitalize until volumes do the same.

Prudential Financial (PRU ): Maintains 4 STARS (accumulate)

Analyst: Catherine Seifert

Reports Thursday night indicated Prudential is mulling the sale of its personal lines property-casualty unit. Long term, this would probably be a positive move for Prudential, since this unit (the 33rd largest property-casualty insurer in 2001) does not have the scale necessary to compete in this commodity business. Profitability here has also come under pressure, with operating profits of $95 million in 2001 vs. $150 million in 2000. S&P estimates this unit could fetch around $1.5 billion.

TXU Corp. (TXU ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: James McCann

The global energy services company's shares are down 20% after a far worse-than-expected revision of its 2002 and 2003 outlook. S&P recently lowered its estimates for both periods, and is again reducing the 2002 estimate by $0.90, to $3.25, and trimming 2003's by $1.15, to $3.35. TXU is being hurt by the impact of low wholesale prices and intense competition in Great Britian. It is still trying to restructure its purchase power contracts. While TXU's consolidated credit rating could be lowered, it should remain investment grade. S&P sees the company's dividend as secure, and sees its 9% yield providing support for shares.

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