S&P Ups L-3 Communications to Accumulate

Also: Analysts' opinions on El Paso, Capital One Financial, Nextel, Home Depot, and Given Imaging

L-3 Communications (LLL ): Upgrading to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Ari Bensinger

The stock has been hampered by lower growth expectations for its explosive detection systems. However, L-3 recently confirmed its 2003 EPS guidance of $2.67 to $2.72, which assumed lower sales of these systems compared with 2002. Moreover, L-3 expects its total security systems business, which includes these systems, to generate less than 5% of total 2003 sales. We at S&P believe L-3 should benefit from increased defense spending to support the war against terrorism and view the shares as attractive at 13 times our 2003 EPS estimate of $2.70, vs. its estimated 20% long-term growth rate.

El Paso (EP ): Upgrading to 2 STARS (avoid) from 1 STAR (sell)

Analyst: Craig Shere, CFA

EP's announcement this morning of $580 million in asset sales, an increase in its 2003 divestiture target to $3.4 billion, and $1.7 billion in new and expected debt financings reduces the risk of financial distress, thus decreasing the equity risk premium for the shares. The $500 million for exploration & production assets is, however, mediocre at best, and we at S&P estimate yesterday's surge in natural gas prices will create another $160 working capital drain. While we expect a March FERC decision on gas market manipulation to be a positive, a draconian ruling could lead to bankruptcy.

Capital One Financial (COF ): Downgrading to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Robert McMillan

COF derives a substantial portion of its business from subprime and automobile lending, two areas where competitors have been hard hit by a weak economy, rising credit losses and delinquencies, and lower auto recovery rates. These same factors will likely pressure COF's business near term and lead to rising credit losses through the first half of 2003. Although the shares are trading at 6.5 times our current $4.50 EPS estimate, which we are reviewing, we see the shares underperforming the S&P 500 until the economic and credit outlook improves.

Nextel Communications (NXTL ): Upgrading to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Todd Rosenbluth

Upon further review of Nextel's solid fourth-quarter operating results, we at S&P believe this is the best pure-play U.S. wireless carrier. We are raising our 2003 operating EPS estimate by 14 cents to 74 cents to account for subscriber gains and debt reduction efforts. The carrier's industry-leading revenue per user, churn, and EBITDA margin-- reflecting its blue-collar customer base-- outweigh our concerns about Nextel's leverage and unexpensed stock options. On a relative valuation basis, we would accumulate Nextel at an enterprise value/EBITDA multiple below its weakened peers.

Home Depot (HD ): Keep 3 STARS (hold)

Analyst: Yogeesh Wagle

January-quarter EPS of 30 cents, vs. 30 cents in the year-ago period, is 3 cents above our estimate. Same-store sales fell 6% on cannibalization by new stores, merchandise resets, and lumber price deflation. We see 9% to 10% sales growth in fiscal year 2004 (ending January) on 200 new stores and level same-store sales. We at S&P expect Home Depot to regain some sales momentum via improved customer service and store layouts, along with broader assortments. But we remain cautious on whether Home Depot's push into flooring and services and new store formats can deliver long-term sales growth. On our $21 to $22 discounted cash flow valuation, we view Home Depot as fairly priced.

Given Imaging (GIVN ): Downgrading to 1 STAR (sell) from 4 STARS (accumulate)

Analyst: Robert Gold

GIVN shares have been pressured by the long decline of the equity markets. Middle East tensions also raise the risk premium for this Israel-based firm. While GIVN has been gaining reimbursement traction for its gastrointestinal imaging system, losses are likely to persist in the coming quarters and we at S&P are concerned about the inability to tap capital markets to fund future growth. We are boosting our 2003 loss estimate by 5 cents per share, to 15 cents, see EPS of 30 cents in 2004. We would advise investors to focus on more liquid names with broad product pipelines and superior balance sheets.

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