S&P Upgrades 99 Cents Only to hold
99 Cents Only (NDN ): Downgrades to 3 STARS (hold) from 2 STARS (avoid)
Analyst: Jason Asaeda
Shares of 99 Cents Only are up Tuesday, as the discount retail chain reported a 23.4% increase in first quarter retail sales. Same-store sales rose 4.3% despite difficult comparisons. Wholesale sales fell 13%. The company opened three stores in the first quarter and plans to open 35 more in 2003, including its first 15 in Texas. Given stronger-than-expected first quarter sales, S&P is raising the 2003 earnings per share estimate by a penny, to 99 cents. The strength of first quarter sales makes S&P less wary of a potential earnings per share shortfall if 99 Cents' reception in Texas is lukewarm. But S&P sees limited upside potential as the company's shares trade at a premium price-earnings to peers.
Altria (MO ): Maintains 3 STARS (hold)
Analyst: Howard Choe
Tobacco stocks are up Tuesday after a news article said a Cook County, Ill., judge temporarily blocked the $3 billion punitive damage award against Altria's Philip Morris USA. Judge Henry allegedly determined that Illinois is not entitled to the damages since it released any future claims it could collect from the industry when it agreed to the 1998 Master Settlement Agreement. If this order holds, it would be a positive for the industry by setting a precedent for future cases, although tobacco still faces many headwinds.
EMC (EMC ): Reiterates 3 STARS (hold)
Analyst: Richard Stice
EMC sees first quarter earnings per share of "at least" one cent, vs. the previous guidance of one cent "at best". The company also expects revenue of $1.35 billion to $1.4 billion, in line with prior expectations. S&P thinks the results reflect the benefits of EMC's business mix, a recent product launch and ongoing cost cutting efforts. For now, S&P is keeping the 2003 earnings per share estimate at 10 cents. While the news is encouraging, S&P sees storage industry still plagued by excess supply, limited visibility, and pricing pressures. With EMC shares trading near S&P's intrinsic value calculation of $8, S&P wouldn't add to positions.
McDonald's Corp. (MCD ): Reiterates 3 STARS (hold)
Analyst: Dennis Milton
Same-store sales for the McDonald's units fell 4.7% in February, including declines of 4.4% in the U.S. and 3.9% in Europe. The company cited sluggish worldwide economies and severe U.S. winter weather. We are maintaining our EPS estimate of 29 cents for the 2003 first quarter. The positive effects of a weaker dollar should offset the reduction we expect in operating margin. The shares are trading at only 9 times our 2003 EPS estimate of $1.44, a discount to peers. However, we would not add to existing shares in the absence of better sales trends.
Tenet Healthcare (THC ): Still 3 STARS (hold)
Analyst: Phillip Seligman
Jeffrey Barbakow has decided to step down as chairman and as a director of Tenet, but will remain CEO. Three other directors will also retire, to be replaced by outside directors, joining the six already on the board. We are encouraged by the increased emphasis on board independence, but see Barbakow's decision leaving the new board less knowledgeable of the company's operations. Separately, we believe Tenet may face legal fines over its once aggressive Medicare outlier payments policy, but believe one shareholder group's estimate of them being up to $6 billion is excessive.
Varian Medical Systems (VAR ): Reiterates 5 STARS (buy)
Analyst: Robert Gold
The company says a stronger-than-expected recovery in the X-ray products area, along with an approximate 20% gain in net oncology system orders, will allow fiscal 2003 second-quarter EPS to beat expectations. Based on the company's new guidance, we expect that second-quarter EPS will range from 43 cents to 48 cents, vs. our current 40-cent forecast, representing year-to-year growth of 35%-40%. For the full year, we now see EPS at about $1.73, versus our former $1.60 estimate. The accelerating growth rate justifies the fiscal 2003 p-e ratio of 27. We would use recent weakness to add to positions.
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