S&P Says Buy CVS

CVS Corp. (CVS ): Reiterates 5 STARS (buy)

Analyst: Joseph Agnese

The drug-store chain and retailer posted first-quarter earnings per share of 48 cents, vs. 43 cents, in line with S&P's estimate. Same-store sales increased 3.9%, including a 7.1% rise in pharmacy sales, despite a negative 2.2% impact from a generic drug conversion. Non-pharmacy same-store sales declined 2.7%, reflecting a negative 2% impact from the shift of Easter to the second quarter. Gross margin widened more than S&P expected, boosted by generic drug conversions, reduced markdowns, and improved shrink. CVS reaffirmed the 2003 earnings per share guidance of $1.92 to $2.00. Shares are trading at 13 times S&P's 2003 earnings per share estimate of $1.94, below peers and near historical lows, making the stock attractive.

Cytyc (CYTC ): Maintains 3 STARS (hold)

Analyst: Robert Gold

Shares are down sharply Tuesday on the news that Tripath Imaging received FDA approval on expanded labeling claims for its SurePath test pack and PrepStain slide processor, which helps to detect high grade squamous intraephithelial and more serious lesions. As a result, S&P thinks TriPath is likely to gain share in clinical lab markets where Cytyc has had historical dominance. The news lowers the visibility on the sustainable organic growth rate for Cytyc, but S&P would maintain its holdings with shares at 15.6 times S&P's 2003 earnings per share estimate of 65 cents, a 40% discount to the medical device group.

RehabCare Group (RHB ): Maintains 4 STARS (accumulate)

Analyst: Mark Basham, Markos Kaminis

Rehab posted first-quarter earnings per share of 25 cents, after an $800,000 loss on consolidation of staffing branches, vs. 22 cents, below S&P's estimate. Operating revenues rose fractionally, as increases in contract therapy and inpatient businesses were largely offset by lower outpatient and staffing revenues. Operating margin expanded slightly as savings from consolidation were partly offset by higher labor costs. Rehab is evaluating its expense structure, and with its expectation of staffing segment stabilization, it maintains its 2003 earnings per share guidance. S&P is reviewing its earnings per share estimates.

MetLife (MET ): Reiterates 5 STARS (buy)

Analyst: Catherine Seifert

MetLife posted first-quarter operating earnings per share of 62 cents, before a 3-cent charge from the conversion of debt securities, vs. 54 cents. Results were in line, albeit with a lot of "noise" from complex financials. Premium growth of 8% was shy of S&P's 9% projection, but a 24% rise in fee income and a 4.9% increase in investment income topped S&P's forecast. MetLife's outlook is tempered by margin compression in spread-based lines, higher pension costs, and dilution from capital raising steps. S&P still sees a conservative $2.80 per share in 2003, and expects $3.10 in 2004. At 10 times S&P's 2003 estimate, S&P views the insurance and financial services firm as modestly undervalued vs. peers.

Gillette (G ): Maintains 4 STARS (accumulate)

Analyst: Howard Choe

Gillette posted first-quarter earnings per share of 25 cents vs. 21 cents, a penny above S&P's estimate. Sales and operating profit were up 14% and 16%. Despite a 5% contribution from foreign exchange, sales were strong across the board with blades and razors leading, though Duracell batteries were surprisingly strong, rising 16% as consumers bought on terrorism concerns and military sales rose incrementally. Despite higher marketing spending and restructuring program costs, operating margins widened by 40 basis points. Free cash flow growth remains strong, up 158%. S&P views Gillette as attractive at more than 25% below S&P's intrinsic value calculation.

Martek Biosciences (MATK ): Maintains 5 STARS (buy)

Analyst: Markos Kaminis

In response to a news piece aired Monday evening, S&P reminds investors that the nutrients DHA and ARA are found within human mother's milk and the placenta of a pregnant mother. In adding Martek's nutritional compound to infant formula, manufacturers strive to create a product that more closely resembles mothers' milk. DHA and ARA have been recognized as important in the infant diet and recommended for inclusion in infant formula by an expert panel of the United Nations Food and Agricultural Organization and The World Health Organization.

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