S&P Says Accumulate Wal-Mart

Wal-Mart (WMT ): Maintains 4 STARS (accumulate)

Analyst: Jason Asaeda

Wal-Mart posted April-quarter operating earnings per share of 41 cents (before 1-cent earnings per share from the discontinued McLane operations), vs. 36 cents. Results benefited from an improved product mix and global sourcing. However, a change in accounting for money received from suppliers reduced earnings per share by 2 cents. Excluding the potential gain from the McLane sale, Wal-Mart sees July-quarter earnings per share of 49 cents to 51 cents and fiscal 2004's (Jan.) at $2.00-$2.05. Given this outlook and Wal-Mart's April-quarter results, S&P trimmed the fiscal 2004 operating earnings per share estimate by 2 cents, to $2.00. At 28 times this estimate, Wal-Mart is at a premium to peers, but at a discount to its cash-flow based intrinsic value.

AutoZone (AZO ): Downgrades from 5 STARS (buy) to 3 STARS (hold)

Analyst: Efraim Levy

AutoZone's recent strength reduces S&P's expectations for additional near-term gains in the share price. Based on a 1.0 ratio of p-e to the expected annual earnings per share growth rate, AutoZone has reached S&P's price target of 15 times S&P's fiscal 2004 (Aug.) earnings per share forecast of $5.80. S&P's discounted cash flow model suggests an intrinsic value of $89 per share. With the shares in the low end of their historical p-e range and with technical trends still positive, AutoZone could appreciate further. But the risk/reward balance appears less favorable.

TJX Companies (TJX ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Yogeesh Wagle

The discount apparel and home furnishings retailer reported April-quarter earnings per share of 22 cents, vs. 27 cents, in line with expectations. Same-store sales slid 2.0% on colder-than-normal weather, particularly in the Northeast. Although same-store sales should rebound in the July quarter, S&P sees increased competition from rivals, and a highly promotional retail environment, limiting sales and margin gains. S&P is lowering the fiscal 2004 (Jan.) earnings per share projection by 5 cents, to $1.22. At 16 times that estimate, almost on par with the S&P 500, but above the three-year historical average, S&P would hold current positions.

IMC Global (IGL ): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Richard O'Reilly

While S&P still is bullish on the fertilizer industry, S&P now thinks that acres in corn, the largest user of fertilizer, will be similar to 2002's 79 million acres, below S&P's earlier forecast of more than 80 million acres. The Latest USDA crop progress report showed 64% of corn acres were planted at last week's end, down from the five year average of 67%, despite above-average rates in major eastern corn states. While lower acres could mean less fertilizer usage this year than forecast, S&P thinks it would produce ongoing tight corn supplies and high 2004 acres. S&P's downgrade reflects near-term uncertainties.

Pacific Sunwear (PSUN ): Maintains 4 STARS (accumulate)

Analyst: Yogeesh Wagle

The specialty retailer posted April quarter earnings per share of 16 cents vs. 7 cents -- 2 cents above the Street's expectations as it reported strong sales performance at both its PacSun and d.e.m.o. stores. Same-store sales grew 13% on double-digit growth in girl's apparel and solid gains in casual footwear and accessories. Young men's apparel sales were slightly positive. S&P is raising its fiscal 2004 (Jan.) earnings per share estimate by 7 cents, to $1.29, on better-than-expected sales trends. Although higher than peers at 18 times that estimate, S&P recommends accumulating Pacific Sunwear's shares on its 20%-plus 3-year earnings per share growth potential.

Kerr-McGee (KMG ): Downgrades to 2 STARS (avoid) from 4 STARS (accumulate)

Analyst: Tina Vital

Energy and chemical company Kerr-McGee posted first-quarter earnings per share of $1.15, vs. a loss of 2 cents, before special items, 12 cents above the Street's expectations (adjusted for impacts). Exploration and production earnings rose 129% on high oil and gas prices; the chemicals unit loss narrowed to $2.6 million from $7.9 million. Barrel of oil equivalent (BOE) production was down 12%, to 295,000 barrels per day on asset sales; Kerr-McGee expects 270,000 barrels per day for 2003. S&P sees 2003 earnings per share at $3.62, and 2004's at $2.93. While the forward p-e is below peers, with an active spending program and reduced BOE production amid a weak balance sheet, S&P would avoid Kerr-McGee.

Rockwell Automation (ROK ): Upgrades to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: James Sanders

Despite continued weakness in capital spending, in S&P's opinion, Rockwell's lean operating structure and strong balance sheet have primed this industrial equipment manufacturer to take advantage of an eventual recovery in business investment spending. Moreover, S&P has confidence in management's ability to continue generating strong free cash flow, as shown by the average free cash flow multiple of 1.8 times earnings (excludes one-time items) over the past four years. Finally, S&P's discount cash flow model indicates shares are trading at a 33%-37% discount to fair value.

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