S&P Ups Sybase to 'Buy'

Sybase (SY ): Upgrades to 5 STARS (buy) from 3 STARS (hold)

Analyst: Jonathan Rudy

S&P is upgrading this database and software integration provider based primarily on its attractive valuation. At 12 times S&P's 2003 earnings per share estimate of $1.13, and 1.5 times sales, Sybase is trading at a notable discount to its peer group. Additionally, the company has a solid management team and a strong balance sheet, with nearly $4.00 in cash and short-term investments per share and no debt. Sybase has also remained solidly profitable despite a difficult economic environment, widening its operating margin to 16%. S&P thinks Sybase's fair value is $16-19.

Forest Laboratories (FRX ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Herman Saftlas

The stock fell sharply Friday as the FDA said it required additional trials for Forest's lercanidipine anti-hypertension agent, which is expected to delay the drug's launch for at least three years. The FDA may have been concerned with the use of supporting European clinical data, which may also affect its review of the experimental memantine Alzheimer's drug. S&P still sees Forest Lab's earnings per share growth exceeding peers, led by continued strength in its antidepressant line. However, S&P now view shares as adequately priced at a 50% premium to the specialty drug group.

Sonoco (SON ): Reiterates 3 STARS (hold)

Analyst: Bryon Korutz

At a meeting on Friday, Sonoco stated it expects to earn $1.46-$1.50 a share in 2003, which includes higher pension costs. S&P is lowering the 2003 estimate to $1.49, from $1.65. Sonoco will make a voluntary $60 million contribution to its pension fund in the fourth quarter. S&P remains concerned with lower sales in the higher-margin composite can business, but continues to be encouraged by lower old-corrugated-container and resin costs, and firming volumes. Shares are now below their fair value of $28-$30, but at a premium to its packaging peers. At 16 times S&P's 2003 estimate, in line with the S&P 500, shares are O.K. to hold.

IBM Corp. (IBM ): Maintains 4 STARS (accumulate); Rational Software (RATL ): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analysts: Megan Graham Hackett, Jonathan Rudy

IBM announced plans to buy Rational Software for $10.50 a share, or $2.1 billion in cash. The acquisition of the software tools company will help flesh out IBM's capabilities in providing business application integration solutions for customers. S&P views the price as reasonable, at three times Rational's 2002 sales and four times its net cash and short-term investments.

Still, S&P says the deal is somewhat pricey given that Rational's shares are trading at 39 times S&P's fiscal 2004 (March) earnings per share estimate of 27 cents. However, this estimate is likely a near cycle trough number. Most of S&P's concerns on Rational center around its management credibility and significant options dilution. However, the cash deal and bluechip IBM management alleviates these concerns. Also, S&P sees revenue synergies from the companies' complementary technologies and verticals.

Intel (INTC ): Reiterates 2 STARS (avoid)

Analyst: Thomas Smith

The chip maker raised its fourth quarter guidance as business tracks a bit better than expected. Revenue is seen at $6.8 to $7 billion, vs. $6.5 to $6.9 billion. Gross margin is seen at the high end of a 47% to 51% range. S&P is raising its estimates to 50 cents from 48 cents for 2002, and from 60 cents to 63 cents for 2003. The positive impact of share buybacks is lessened by the company's exposure to a stock option expense, which was 15 cents in 2001 under SFAS 123.

In a modest year for PC sales, Intel is seeing a typical seasonal upswing. But visibility into 2003 is low. Shares are trading near 30 times S&P's 2003 estimate, and shares are above market.

Qualcomm (QCOM ): Maintains 3 STARS (hold)

Analyst: Ari Bensinger

Qualcomm expects to ship at least 28 million MSM phone chips in first quarter, exceeding its previous estimate of 25 million to 28 million. The company also expects to ship about 24 million to 27 million MSM chips in the second quarter, up from a previous estimate of more than 20 million.

Qualcomm is benefiting from a code division multiple access (CDMA) digital technology upgrade cycle to 1X products. But with chips shipped typically one to two quarters before subscriber adoption, S&P thinks there's a risk for a potential 1X chip inventory situation if 1X subscriber growth disappoints. Qualcomm is best positioned to benefit from a shift to 3G technology, but at 33 times S&P's fiscal 2003 (Sept.) earnings per share estimate of $1.20 and 10 times fiscal 2003 sales, well above peers, S&P says the opportunity already is factored into the price.

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