S&P Says Buy Toys R Us

Toys R Us (TOY ), Chico's (CHS ), and Wal-Mart (WMT ): Maintains 5 STARS (buy)

Analyst: Thomas Graves

Although sales in this holiday season have generally been disappointing, S&P expects that improved inventory management will help to keep the fourth quarter from being a profit disaster. Also, while consumers are likely to remain cautious, S&P looks for some of the spending that has flowed to home and auto purchases during the the past year to shift increasingly to other categories.

Syncor (SCOR ): Reiterates 3 STARS (hold), and Cardinal Health (CAH ): Reiterates 5 STARS (buy)

Analyst: Phillip Seligman

At a special meeting of Syncor holders on Monday, an overwhelming majority of the outstanding Syncor shares were voted to approve the proposed merger with Cardinal Health, slated to be effective as of Jan. 1, 2003. The deal, which swaps 0.47 Cardinal Health share per Syncor share, should be a plus for Syncor owners as they stand to benefit from being part owners of Cardinal Health, one of the savviest companies in the health care arena. S&P sees the deal helping to sustain Cardinal Health's 20%-plus earnings per share growth over the next three years, at least.

Carlisle Companies (CSL ): Initiates with 3 STARS (hold)

Analyst: Bryon Korutz

Carlisle is a diversified maker of products including roofing materials, industrial components, and home products. S&P's discounted cash flow model (8.1% weighted average cost of capital, and decelerating free cash flows) indicates an intrinsic value $40-$46 a share. S&P sees earnings per share at $2.35 in 2002 and $2.75 in 2003. The firming economy should boost sales in most segments and margins should be aided by efficiencies. But S&P remains concerned by the softness in nonresidential construction. With Carlisle's share price in the fair value range, S&P says hold the shares.

Kerr-McGee (KMG ): Maintains 4 STARS (accumulate)

Analyst: John Kartsonas

The oil explorer late Monday announced an aftertax fourth quarter non-cash charge of $385 million related to impairments of certain oil and gas fields in the North Sea and the Gulf of Mexico. Furthermore, it expects proven reserves of about one billion barrels of oil equivalent by year end, translating into a ratio of enterprise value to proven reserves of about $8.10 per barrels of oil equivalent, slightly above peers. However, shares are trading at 5.1 times the enterprise value to S&P's 2003 debt-adjusted cash flow estimate -- below peers -- and at a 20% discount to S&P's net asset value calculation based on reserves.

King Pharmaceuticals (KG ): Maintains 3 STARS (hold)

Analyst: Herman Saftlas

King bought the North American rights to asthma inhalants Intal and Tilade, and bought the world-wide rights (excluding Japan) to Synercid antibiotic from Aventis for $200 million. These new drugs should add over $70 million to sales, but the company's earnings per share guidance for 2003 (Wall Street's consensus now is at $1.61) remains unchanged as incremental profits will be used to expand its sales force. S&P says growth in King's key Altace anti-hypertensive line is slowing, and Levoxyl thyroid sales are likely to flatten under tougher competition. King is trading at a discount based on its price-earnings ratio, compared to the average specialty drug multiple.

Marriott International (MAR ): Maintains 3 STARS (hold)

Analyst: Thomas Graves

Before one-time items, the expected sale of Marriott's senior living business is not likely to have a sizeable impact on 2003 earnings per share. S&P looks for a stock repurchase from sale proceeds to offset the absence of a relatively modest profit from Marriot's sold business. Expectations for a much larger Marriott lodging segment should be a far bigger factor in its stock price. S&P is still not enthusiastic about the outlook for business travel, and sees Marriott as adequately priced at 16 times the $2.05 earnings per share that S&P sees for 2003 (trimmed from $2.10), modestly above the "bottom up" estimated price-earnings multiple for the S&P 500.

Ariba (ARBA ): Maintains 3 STARS (hold)

Analyst: Scott Kessler

The software company says it will restate its fiscal 2001 (Sept.) financials and delay the filing of its fiscal 2002 10-K. Ariba will change its treatment of a $10 million payment made by its Chairman and co-founder Keith Krach in March 2001 to its then-President and COO Larry Mueller. Ariba initially viewed the payment as a private transaction, but now thinks it should be treated as a capital contribution from Krach to Ariba, and then from Ariba to Mueller. S&P sees a minimal financial impact from these actions, but thinks the payment clearly raises questions and concerns.

Tyco International (TYC ): Maintains 3 STARS (hold)

Analyst: Michael Jaffe, James Corridore

Tyco finished its forensic review of accounting, saying it found no systemic fraud, but that prior management engaged in a pattern of aggressive accounting to inflate earnings. The reversal of prior accounting would not materially affect cash or earnings. These findings are more or less what S&P, and most analysts, were expecting. With this news past and the stock at a modest valuation of 10 times S&P's 2003 earnings per share estimate, well below market, S&P would hold Tyco. However, its faces $9 billion in debt repayments in 2003, along with uncertainties about new management.

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