Hold CheckFree as Top Exec to Step Down

CheckFree (CKFR ): Maintains 3 STARS (hold)

Analyst: Richard Stice

The provider of electronic commerce services announced Monday that its president and COO will resign in January 2003. Instead of filling the open position, CheckFree plans to adopt a new management structure involving more direct reporting to the chairman and CEO. S&P sees the news as a short-term negative only as other key personnel remain. The company's execution has been solid, aided by cost control efforts. But S&P is concerned with competitive threats and valuation. With shares trading at 26 times S&P's fiscal 2003 estimate -- at a premium to the broader market and the projected long-term growth rate -- S&P thinks the upside is already reflected in the stock price.

OM Group (OMG ): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Michael Santicchia

S&P upgraded the specialty chemicals maker on news of an $100 million loan approval. OM Group says its $325 million revolving credit facility and $600 million term loan agreement were amended to convert $100 million of the revolving credit facility to a term loan that will mature in 2006. The amendments should give OM Group more time to implement its previous restructuring plans, which include selling non-core assets, closing unprofitable operations and aggressively reducing costs. Although the market is reacting positively, S&P would keep a cautious stance and wait for details of the restructuring on Dec. 12.

Steak `n Shake (SNS ): Maintains 2 STARS (avoid)

Analyst: Dennis Milton

The company restated fiscal 2002 (Sept.) earnings per share to 83 cents from 86 cents and upped the fiscal 2001 earnings per share to 72 cents from 76 cents. The adjustments resulted from the reclassification of operating leases as capital leases. Steak 'n Shake had previously said that such changes would not have a material effect on net earnings. The company intends to renegotiate and amend leases in order to return them to an operating lease classification. S&P is placing the fiscal 2003 earnings per share estimate, previously 90 cents, under review and awaits further clarification from the company.

Boeing (BA ) and General Electric (GE ): Maintains 3 STARS (hold)

Analyst: Robert Friedman

S&P is keeping its hold rankings despite the news that United Airline's parent UAL filed for Chapter 11 bankruptcy. S&P expects both Boeing and GE to be negatively impacted by UAL's reorganization, and thinks UAL will renegotiate most existing sales and leasing contracts to dramatically cut its bloated operating overhead. However, as S&P's valuation models already bake in modest long-term free cash compound annual growth rate (CAGR) estimates, S&P believes it has already accounted for the mediocre economics of the commercial aviation business. S&P's models continue to appraise GE as being worth $23-$31 and Boeing with a $34-$39 per share value.

Albertson's (ABS ): Reiterates 3 STARS (hold)

Analyst: Joseph Agnese

The grocery chain reported October quarter earnings per share of 48 cents vs 43 cents, in-line with the Street's estimates. Sales fell 4.2%, reflecting escalating competitive activity and declining consumer confidence. Results benefited from shrink reduction efforts, improved procurement programs and lower interest expense despite increased insurance and employee benefits costs. To drive sales growth, the company intends to invest heavily in promotional programs while speeding cost cutting initiatives. Trading at 10.6 times S&P's fiscal 2004 (Jan.) earnings per share estimate of $2.15, near historical lows, shares are O.K. to hold.

Brocade Communications (BRCD ) and McData (MCDTA ): Reiterates 2 STARS (avoid)

Analyst: Richard Stice

A U.S. District Court ruled that McData's motion for a preliminary injunction against Brocade has been denied. While S&P believes the decision is a near-term setback for McData, the ultimate resolution is still uncertain. The ongoing suit adds an additional layer of concern given weak the IT spending environment, growing competitive threats, poor visibility and excessive valuation. With shares trading at a premium to the broader market on a P/E and PE/growth basis, S&P says avoid.

Mercury Computer Systems (MRCY ): Maintains 3 STARS (hold)

Analyst: Megan Graham Hackett

Mercury preannounced better than expected December quarter results. Mercury now expects revenues to exceed the high end of its prior guidance of $40 million to $43 million by 10%, and sees earnings per share of 25 cents to 29 cents, vs. its prior estimate of 18 cents to 22 cents. Mercury, which has been plagued by low visibility in its defense business, noted that it received several orders in the quarter that required shipment in the same quarter. S&P is raising the fiscal 2003 (June) estimate by nine cents to $1.02. At 31 times the fiscal 2003 estimate, shares are rich vs. market, but with strong free cash flows, shares are worth holding.

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