Upgrading Mercury Interactive

Mercury Interactive (MERQ ): Upgrades to 3 STARS (hold) from 1 STAR (sell)

Analyst: Mark Basham

Shares are now more than 20% below S&P's $20 intrinsic value target. Shares have fallen of late as sell-side analysts have lowered their estimates for both 2002 and 2003, bringing the Street's consensus close to S&P's $0.63 and $0.77 estimates. To justify the low price at which Mercury is currently trading, S&P says it has to assume what thinks are unrealistically low cash flow growth assumptions over a multi-year period beyond 2003. Still, the ongoing IT slump and options-based compensation issue restrains S&P's enthusiasm.

Helix Technology (HELX ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Marcos Kaminis

Despite better-than-anticipated revenues in the June quarter, S&P thinks world events and related market risk, along with indications of industry softness, dictates a less aggressive opinion on this high-beta stock (1.84 by S&P's calculation) is warranted. At a later date, as market conditions improve, the shares could present an attractive value proposition and once again warrant purchase. With no debt, and with shares trading at their lowest price-to-book ratio in the last ten years, S&P still views Helix as worth holding.

International Rectifier (IRF ): Downgrades to 1 STAR (sell) from 4 STARS (accumulate)

Analyst: Thomas Smith

The company announced preliminary results for the September quarter with revenue in line with estimates and gross margin a bit lower. Given the lack of seasonal improvement for PCs, the company expects December quarter revenue to be flat (plus or minus 5%) with the September quarter, and sees gross margin lower, which adds up to a recovery push-out. S&P is lowering its fiscal 2003 (June) earnings per share estimate to $0.90 from $1.40, and is cutting the fiscal 2004 estimate to $1.50 from $2.00. The price-earnings ratio of 13 times S&P's $1.20 calendar 2003 estimate is at a discount to the broader market. But the price-book ratio of 1.1 is well above the 1998 cycle lows near 0.6. Many of International Rectifier's peers trade below the book value.

Ruby Tuesday (RI ): Maintains 4 STARS (accumulate)

Analyst: Dennis Milton

The company posted August quarter earnings per share of $0.31, up 19% from a year ago and in line with S&P's estimate. Although same store sales at grew only 1.1%, total sales rose 9.6% on store openings. Margins widened on well-controlled restaurant costs and reduced advertising spending. S&P expects earnings per share to rise 18% for fiscal 2003 (May), to $1.35, excluding one-time charges, reflecting expansion and a favorable cost environment. At only 13 times this estimate, Ruby Tuesday shares trade only in line with peers despite the company's superior growth prospects.

Bob Evans Farms (BOBE ): Initiates with 4 STARS (accumulate)

Analyst: Dennis Milton

Bob Evans Farms operates a chain of 500 family-style restaurants, and produces and distributes pork sausage and other food items. S&P expects revenues and earnings per share to grow in the mid- to high single-digits over the next several years, primarily on restaurant expansion. At 11.5 times S&P's fiscal 2003 (April) earnings per share estimate of $2.04, Bob Evans is attractively valued at a discount to peers, despite the company's promising growth prospects. S&P's cash flow model indicates shares are currently undervalued by nearly 20%.

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