S&P Says Buy Procter & Gamble

Procter & Gamble (PG ): Maintains 5 STARS (buy)

Analyst: Howard Choe

Before charges, consumer products giant P&G posted March quarter earnings per share of 96 cents vs. 84 cents, as expected. This is P&G's fifth consecutive quarter of double-digit earnings per share growth. Revenue and volume growth were up a strong 8%, led by health and beauty care products. Operating margin widened by 50 basis points on lower overhead. P&G's outlook for the fourth quarter and full-year fiscal 2004 (June) is bullish and in line with S&P's estimates. Free cash flow remains strong, up 37% year to date. With its strong fundamentals, P&G is attractive at 23 times S&P's calendar 2003 earnings per share estimate, in line with top peers and below S&P's estimate of intrinsic value.

Lehman Brothers (LEH ): Reiterates 5 STARS (buy); Bear Stearns (BSC ): Reiterates 4 STARS (accumulate); and Merrill Lynch (MER ), Goldman Sachs (GS ) and Morgan Stanley (MWD ): Maintains 3 STARS (hold)

Analyst: Robert McMillan

S&P is keeping its opinions on selected brokerage stocks. U.S. securities regulators reached the final terms of a $1.4 billion settlement with 10 Wall Street banks accused of issuing biased investment research to gain investment banking business, according to New York Attorney General Eliot Spitzer, who had initiated the investigations. S&P thinks this settlement is good for the industry, but doubts it will alter negative near-term industry fundamentals.

Humana (HUM ): Maintains 3 STARS (hold)

Analyst: Phillip Seligman

The health benefits company's fourth quarter adjusted earnings per share of 31 cents, vs. 28 cents, is in line. S&P is encouraged by Humana's improved commercial results and selling, general, and administrative cost ratio. But the 2% internal commercial member growth Humana reported in the first quarter is below what some large rivals have experienced. Moreover, the 12%-14% medical cost trend Humana sees in 2003 is also above rivals, who so far see moderating trends. S&P thinks this could make it tougher for Humana to compete, given growing employer resistance to mid-teens annual premium hikes. At seven times S&P's 2003 earnings per share estimate of $1.40, vs. the expected 12% long-term growth, S&P sees Humana as a market performer, at best.

Sysco (SYY ): Reiterates 5 STARS (buy)

Analyst: Joseph Agnese

Food and foodservices distributor Sysco posted third quarter earnings per share of 26 cents vs. 23 cents -- a penny per share below expectations. Total sales grew 13.8%, reflecting 5.7% real growth, 0.8% food cost inflation, and 7.3% growth from acquisitions. Margins benefited from improvements in pieces per stop, lines per stop, pieces per trip, and pieces per mile. S&P thinks Sysco is continuing to gain share within customers and from competitors as it expands its customer base. Despite shares trading at 22 times S&P's calendar 2003 earnings per share estimate of $1.23, above peers, S&P sees the shares of this clear industry leader outperforming in the current uncertain market environment.

Charles Schwab (SCH ): Reiterates 2 STARS (avoid)

Analyst: Robert McMillan

Discount brokerage firm Schwab announced that it will offer home mortgage loans through its newly launched Charles Schwab Bank, following regulatory approval earlier this month. Although S&P thinks Schwab needs to diversify in order to reduce its reliance on businesses driven by the stock market, S&P doubts that this new bank will make a significant contribution, especially since the cycle of interest rate reductions and very strong demand for home mortgages is probably nearing an end. S&P would avoid Schwab shares, which are trading at 29 times S&P's 2003 operating earnings per share estimate of 30 cents -- a premium to the market.

Tyson Foods (TSN ): Maintains 3 STARS (hold)

Analyst: Joseph Agnese

Poultry processor Tyson posted March quarter operating earnings per share of 3 cents vs. 18 cents -- 3 cents above S&P's expectations. Results were hurt by high feed costs, increased live cattle prices, and lower market prices amid excess protein supplies. Despite the difficult near-term environment, Tyson sees better results in the second half of fiscal 2003 (Sept.) on the strengthening economy and improved balance in supply and demand for meat proteins. Shares are trading at 11 times S&P's calendar year 2003 earnings per share estimate of 85 cents, in line with industry peers. S&P recommends holding Tyson to await improvement in its business environment.

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