S&P Upgrades Comcast to Buy

Comcast (CMCSA ): Upgrades to 5 STARS (buy) from 3 STARS (hold)

Analyst: Tuna Amobi

December quarter pro forma revenues and EBITDA grew respectively to $5.7 billion and $1.3 billion, above expectations. S&P expects significant 2003 gains from the November 20002 AT&T Broadband acquisition and robust 2.3 million high speed data and digital net subscriber adds combined. With system upgrades targeted for 93% two-way access completion, and the QVC retail business a cash flow machine, 2003 pro forma EBITDA could grow 25%, potentially exceeding $7 billion, yielding break-even to modest positive free-cash flow by yearend. Comcast has compelling relative value, with shares trading at nine times the enterprise-value to-EBITDA.

Hispanic Broadcasting (HSP ) and Univision (UVN ): Reiterates 4 STARS (accumulate)

Analyst: Tuna Amobi

With the Department of Justic granting its tentative approval, the $3.5 billion stock swap acquisition of the nation's largest Spanish radio group Hispanic Broadcasting by Spanish TV giant Univision is set to close by March 14. Approval was expected. Under the terms, Univision is required to convert its 27% equity holding in Spanish broadcaster Entravision to non-voting preferred stock, subsequently reducing its interest to 10% within six years. The development sets the stage for a rubber stamp from the FCC. Univision is set to be a leading force in the fast-growing demographic segment.

Payless Shoesource (PSS ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Yogeesh Wagle

January quarter earnings per share of 15 cents vs. 41 cents before one-time charges is in line with expectations. Results were hurt by slightly lower same-store sales, and by added freight costs and merchandise delays from the West Coast dock strike. S&P expects mid-single-digit sales growth in fiscal 2004 (Jan.) on 1%-2% same-store sales gains and 50-60 net store additions. With slower domestic growth, Payless continues to expand into Central and South America and Caribbean via joint ventures. At nine times S&P's $5.21 pre-split fiscal 2004 estimate, below the S&P MidCap 400, and with sustainable 15%-16% earnings per share growth, Payless Shoes has appeal.

Microsoft (MSFT ): Reiterates5 STARS (buy) and Electronic Arts (ERTS ): Reiterates 4 STARS (accumulate)

Analysts: Jonathan Rudy, Scott Kessler

Microsoft and Electronic Arts are both considering bids for Japanese videogame developer Sega, according to Friday's Wall Street Journal. Sega last week announced a curious agreement to basically be acquired by pachinko machine manufacturer Sammy. Sega's properties, including Sonic the Hedgehog and several sports games, have appeal. Sega would also help each of Microsoft and Electronic Arts to strengthen its presence in Japan. Although the two companies have the resources to acquire Sega, S&P thinks Sega's pending deal with Sammy and its history of losses reduces the likelihood of a combination.

Gap (GPS ): Maintains 3 STARS (hold)

Analyst: Yogeesh Wagle

The retailer posted fourth quarter earnings per share of 27 cents vs. a loss of four cents, in-line with expectations. Same-store sales grew 8%, driven by a 14% increase at Old Navy vs. a decline of 20%. S&P sees 3% to 4% net sales growth in fiscal 2004, on continuing first half same-store sales gains and net square footage growth of about 2%. Margins should widen significantly on product improvements, lower sourcing costs, and higher maintained mark ups. With new management in place and a more customer-centric focus, Gap's turnaround seems solid. But at 20 times S&P's 76 cents fiscal 2004 estimate, the shares are pricey. S&P would not add to positions.

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