S&P Upgrades Aetna to Accumulate

Aetna (AET ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Robert Gold, Philip Seligman

Aetna has agreed to settle a national class action suit alleging that the company improperly reduced physician payments and interfered with patient care decisions. Aetna is to pay $100 million in cash (or $150 per physician), make a $20 million donation to establish a foundation to improve health-care quality, and pay $50 million to the plaintiffs' attorneys. At 13.6 times the 2003 operating earnings per share forecast of $4.21, Aetna is priced about 10% above peers, which S&P feels is justified by recent operational improvements, moderating medical cost trends and the removal of a litigation overhang.

Hot Topic (HOTT ): Maintains 3 STARS (hold)

Analyst: Jason Asaeda

The retailer posted April-quarter earnings per share of 14 cents , vs. 11 cents -- beating S&P's estimate by 1 cent. Overall sales rose 26%, with same-store sales rising 2.6%. Profitability was limited by lower merchandise margins, markdowns, and higher occupancy and store operating costs. Hot Topic believes it will be able to gain expense leverage in the second half of fiscal 2004 (Jan.) with low- to mid-single-digit positive comp-store sales. S&P has adjusted its fiscal 2004 estimate up 1 cent, to $1.26 to reflect first-quarter results, but with Hot Topic facing tough comparisons in the third and fourth quarters, and with shares at modest premium p-e multiple to peers, S&P recommends hold.

Synopsys (SNPS ): Maintains 4 STARS (accumulate)

Analyst: Richard Tortoriello, Thomas Smith

Chip-equipment maker Snyopsys reported second-quarter fiscal 2003 (Oct.) earnings per share of 80 cents before goodwill and acquisition-related charges (GAAP 29), vs. 39 cents (GAAP 33), 10 cents above the Street. Sales increased 57%, aided by acquisitions. Orders set a company record. Synopysy guided for third-quarter earnings per share of 77 cents to 82 cents (before goodwill basis), vs. the Street's 75 cents . Recent product releases create an end-to-end design portfolio. S&P is reviewing its fiscal 2003 (Oct.) earnings per share estimate of $2.97 (before goodwill); the company guided to $2.95 to $3.10 per share, and says it's optimistic about achieving the high end of this range.

Patterson Dental (PDCO ): Maintains 4 STARS (accumulate)

Analyst: Massimo Santicchia, Mark Basham

The dental-supply company posted April-quarter earnings per share of 49 cents vs. 40 cents, in line with S&P's estimate. Excluding acquisitions, North American sales rose 9% on demand for new products such as the CEREC 3 dental restorative system and digital radiography. S&P believes that Patterson can sustain a growth rate in revenues of 12% and earnings per share of 20% over the next three years. In S&P's view, Patterson's premium valuation at 21 times S&P's fiscal 2004 (Apr.) estimate of $2.04 earnings per share, on $1.9 billion in revenues, is justified by its strong competitive position, high quality of earnings, and robust cash flow generation.

Men's Wearhouse (MW ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Thomas Graves

Before a 2001 net benefit from special items, first-quarter earnings per share of 27 cents, vs. 25 cents is in line with S&P's estimate. However, S&P is increasingly cautious about prospects for Men's Wearhouse's K&G business to be a long-term growth driver, and is expecting less upside for shares after a recent rise. Including first-quarter special items, S&P estimates $1.21 earnings per share for fiscal 2004 (Jan.), with profit margins aided by higher initial markups and fewer markdowns. S&P sees the stock still having some appeal, based on a p-e below the S&P 600, and the prospect of a longer-term trend toward men wearing suits more often.

Sovereign Bancorp (SOV ): Maintains 5 STARS (buy)

Analyst: Erik Eisenstein

Sovereign reiterated its second-quarter and full-year 2003 operating earnings per share guidance of 35 cents to 36 cents and $1.44-$1.45, respectively. Although it had previously renewed this guidance as recently as early May, it is a mild comfort that they do so again, even with seemingly more likely Federal Reserve rate cuts, and increased asset prepayment prospects in an intensified refinancing boom. Sovereign also set a small share repurchase program, which S&P thinks is mostly to signal confidence to the market, since such purchases would run counter to Sovereign's goal of building its capital.

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