S&P Ups Pfizer to Buy

Pfizer (PFE ): Upgrades to 5 STARS (buy) from 4 STARS (accumulate)

Analysts: Robert Gold, Herman Saftlas

Pfizer received European Union approval to acquire Pharmacia, with the understanding that it will divest its darifenacin urinary incontinence drug and some sexual dysfunction drugs in development, as well as other compounds that are immaterial to Pfizer's future growth. S&P expects the Federal Trade Commission to O.K. the deal within 45 days. Assuming annual cost synergies of $2.5 billion, S&P sees proforma earnings per share of $1.80 in 2003 and $2.05 in 2004, with a modest stock option overhang. The combined entity has an intrinsic value of $45 based on conservative free-cash flow assumptions. And at 14 times S&P's 2004 earnings per share estimate, Pfizer is priced below peers.

Shaw Group (SGR ): Downgrades to 1 STAR (sell) from 3 STARS (hold)

Analyst: Stewart Scharf

Shaw lowered its guidance for fiscal 2003 (Aug.) and fiscal 2004 as power markets remain soft. Although it intends to ease liquidity concerns via several debt transactions, including a tender offer for $385 million of Liquid Yield Option Notes, funded in part by a $250 million senior notes placement, S&P says Shaw's fiscal 2004 free-cash flow is expected to fall to near $90 million from fiscal 2003's $130 million. With more project suspensions possible, S&P is cutting the fiscal 2003 earnings per share estimate by 60 cents to $1.35, and is trimming fiscal 2004's by 40 cents to $1.50. At eight times the fiscal 2003 estimate, with S&P Core projected earnings per share 11% lower, and 73% of options under water, S&P says sell Shaws.

Men's Wearhouse (MW ): Reiterates 4 STARS (accumulate)

Analyst: Thomas Graves

January quarter earnings per share of 50 cents vs. 39 cents topped analysts estimates and Men's Wearhouse's early January guidance. Gross margin expansion to 37.2% from a year ago's 34.8% is especially impressive. Also, S&P expects that the company entered fiscal 2004 (Jan.) with its inventory in relatively good shape. S&P looks for profit margin gains in fiscal 2004, helped by higher initial markups, and lower markdowns. Before special items, S&P is adjusting the fiscal 2004 earnings per share estimate up by a penny to $1.21. Based on a below-market price-earnings ratio and the prospect of a longer-term trend toward men wearing suits more often, Men's Wearhouse is attractive.

Sovereign Bank (SOV ): Maintains 5 STARS (buy)

Analyst: Erik Eisenstein

The company presented further details on a tender offer for 2004 debt announced Wednesday. While S&P should know more when the offer concludes in a few weeks, the deal does reflect positively on Sovereign's ability and willingness to pare down expensive leverage taken on during the FleetBoston transaction in 2000. Sovereign will take a loss on early extinguishment, which looks to be offset by the sale of some home equity loans with unattractive overall returns. In accordance with improved guidance, S&P is raising the 2003 earnings per share estimate by four cents to $1.44. The target remains $16.

SBC Communications (SBC ): Maintains 2 STARS (avoid)

Analyst: Todd Rosenbluth

The lack of Justice Department support for SBC's long distance bid in Michigan is concerning. S&P awaits the FCC's decision by mid-April, but a second long-distance entry delay due to billing errors would be problematic since SBC is losing local customers in this large territory to other telecoms as well as to wireless and cable substitutions. S&P continues to believe that SBC should focus on fixing its operational problems in telecom rather than bid for cable properties. Investors should steer clear of this beleagured stock at 13 times S&P's 2003 estimate $1.64.

Lamar Advertising (LAMR ): Downgrades to 1 STAR (sell) from 2 STARS (avoid)

Analyst: Tuna Amobi

The recent consumer confidence plunge has heightened uncertainty in the near term, as news flow suggests systemic advertising pacings have continued to taper off since the orange security alert. Although ad-spend dislocation could spark pent-up demand in second half, S&P expects an outdoor advertising recovery to lag electronic and print media, with pure operator Lamar more exposed than diversified peers Viacom and Clear Channel. With lackluster occupancies and high leverage, S&P is doubling the 2003 loss estimate to 18 cents a share. S&P sees more downside at an enterprise value of 13 times the estimated 2003 EBITDA.

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