S&P Says Hold Home Depot

Home Depot (HD ): Maintains 3 STARS (hold)

Analyst: Yogeesh Wagle

Shares are up 10% Tuesday as the home-improvement retailer posted April-quarter earnings per share of 39 cents, vs. 36 cents -- 3 cents above S&P's estimate. Gross margin improved by 150 basis points on cost savings from centralized merchandising and on less shrinkage. Same-store sales slid 1.6%, less than expected, amid colder weather, the economy, war worries, and lower lumber prices. Home Depot's merchandising resets seem to be boosting sales, particularly in the kitchen and bath areas. However, with the overhang of sales cannibalization and competitor Lowe's aggressive expansion likely limiting earnings growth to 12%-14%, S&P sees Home Depot as adequately valued.

McDonalds (MCD ): Maintains 3 STARS (hold), and Wendy's (WEN ): Maintains 4 STARS (accumulate)

Analyst: Dennis Milton

The U.S. has temporarily banned Canadian beef imports after Canada reported a case of bovine mad cow disease. The infected animal was allegedly found in Alberta, and was quarantined immediately. Officials stressed that the animal did not enter the food chain. Mad cow disease, or bovine spongiform encephalopathy, is highly contagious among herds and potentially lethal if ingested by humans. S&P sees restaurants stocks, especially those of fast food hamburger companies like Wendy's and McDonald's, being hurt by the news.

Motorola (MOT ): Maintains 3 STARS (hold)

Analyst: Kenneth Leon

On Tuesday, Motorola stated its guidance for the second quarter of 2003 may be negatively impacted by the SARS epidemic in China. The mobile-phone maker said sales may be down 15%-20% in China for its products. In the first quarter, China was 14% of total sales, and Asia Pacific was 28% of overall sales. About 50% of Motorola's products are manufactured in Asia, and Motorola said that operations are running on schedule. S&P's second-quarter earnings per share estimate of three cents will be monitored with sales soft in China. On an enterprise valuation basis, the stock is trading at a below-peers 0.7 times S&P's 2003 sales estimate. S&P would hold the shares for a potential recovery later in the year.

Medtronic (MDT ): Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: Robert Gold

Medtronic posted fiscal 2003 (May) fourth-quarter earnings per share of 40 cents, vs. 34 cents, in line with S&P's estimate. Relative to S&P's estimates, there was upside in Medtronic's pacemaker, implantable cardioverter defibrillator, and vascular and spine categories, but diabetes sales growth of 12% was below S&P's -- and Medtronic's -- expectations. For fiscal 2004, Medtronic scaled back guidance, with earnings per share now seen at $1.61, vs. the $1.64 consensus. S&P thinks this reflects concerns over trends in diabetes and stents, and a chance for decelerating growth in cardiac rhythm management. S&P is trimming the earnings per share forecast by 5 cents, to $1.62. Given the valuation premium to peers, S&P is taking a less aggressive stance on Medtronic with a target price of $53.

Nextel (NXTL ): Maintains 5 STARS (buy)

Analyst: Kenneth Leon

Nextel reaffirmed its guidance for 2003, and stated that the second quarter is looking very solid. S&P expects 12% service revenue growth and 23 cents earnings per share in the second quarter of 2003. Average revenue per user may rise to $68 in second-quarter, vs. $67 in the first quarter of 2003. Verizon and and Sprint PCS, which are launching a competitive push into talk services, are not a major concern because of latency issues with their networks, according to Nextel. S&P thinks the rollout of nationwide Direct Connect is a key driver for Nextel growth. Federal Communications Commission spectrum interference issues may be resolved in 2003. Trading below the market at 14 times S&P's 2003 estimate of 97 cents, S&P would buy the shares.

Zimmer (ZMH ): Maintains 4 STARS (accumulate)

Analyst: Robert Gold

Orthopedic implant maker Zimmer announced a $3.2 billion bid to acquire Centerpulse, surpassing an existing offer from Smith & Nephew by about $800 million. Strategically, S&P views the deal favorably since it would significantly expand Zimmer's European presence and provide a foothold in the spine segment. However, S&P sees a chance for some earnings per share dilution, and there's some litigation risks embedded in Centerpulse. Weakness on Tuesday in Zimmer shares has removed some valuation premium vs. Zimmer's orthopedic peers. Given the potentially dominant market positions for the combined company, S&P thinks Tuesday's selloff appears overdone.

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