S&P Ups Sprint PCS

Sprint PCS (PCS ): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Kenneth Leon

S&P thinks Sprint PCS, which has been a laggard in the wireless group, may begin to execute better in coming quarters, though S&P continues to estimate operating losses. S&P expects EBITDA margins to improve in 2003 on an improved focus on customer retention and lower marketing costs. As of May 23, PCS shares were up 3.9% for 2003, vs. 25% for the S&P wireless sub-sector index. S&P thinks a favorable potential catalyst may be the recombination being considered of this tracking stock with Sprint itself. At an 0.4 ratio of price to projected 2003 sales, below peers, S&P would hold PCS.

Molex (MOLX ): Reiterates 2 STARS (avoid)

Analyst: Stewart Scharf

Shares are up 11% Friday on the impact of Molex cost cuts. Molex sees June-quarter revenue high in its $450 million to $460 million guidance range, aided by the effect of strength in the euro. It now expects earnings per share, before a 14-cent to 15-cent charge, will be 1 cent or 2 cents above its prior forecast of 14 cents, reflecting the elimination of bonus payments. However, S&P sees no sign of a near-term telecom optical recovery as lead times remain short in the supply chain. S&P thinks excess capacity is still a problem and that the Europe market will remain soft. At 50 times S&P's 55 cents estimate for fiscal 2003 (June), sharply above peers, S&P says avoid.

Michaels Stores (MIK ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Dennis Milton

The craft supplies retailer's April earnings per share of 30 cents vs. 27 cents, before one-time items, was a penny ahead of S&P's estimate. Revenues rose 8.8%, reflecting expansion and same-store sales growth of 2%. Operating margins were flat, as increased selling, general, and administrative expenses expenses offset a wider gross margin. S&P is raising the fiscal 2004 (Jan.) earnings per share estimate by 2 cents, to $2.38, in order to reflect share repurchases. Having rebounded 80% from its March low, Michael's shares are now at 16 times that estimate, a premium to peers. At this valuation, S&P thinks the shares adequately reflect the company's growth prospects.

Dollar Tree : (DLTR ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Jason Asaeda

April quarter earnings per share of 29 cents, vs. 25 cents was 2 cents above S&P's estimate. Sales rose 21%, with comp-store sales up 2.2%. The discount retailer's results benefited from lower store operating costs, partly offset by shrinkage and markdowns, and about $2 million in expenses related to a change in accounting for operating leases. Since S&P sees gross margins remaining under pressure from shrinkage and increased sales of lower-margin consumables, S&P is trimming the fiscal 2004 (Jan.) earnings per share estimate by 4 cents, to $1.50. Dollar Tree trades at a p-e discount to peers, but with earnings growth slowing, S&P would not add to positions.

First Health (FHCC ): Upgrades to 3 STARS (hold) from 1 STAR (sell)

Analyst: Phillip Seligman

Today's The Wall Street Journal highlighted a developing situation whereby state Medicaid programs can band in buying collectives to jointly negotiate with drug makers in order to lower their drug costs. This program, according to the report, will be run via private entities, with a unit of First Health being a principal beneficiary. Although First Health has offered pharmacy benefit management to Medicaid programs for years, S&P believes its possibly increased role will help raise its visibility and attract new business. However, S&P is not changing its earnings model.

RealNetworks (RNWK ): Reiterates 1 STAR (sell)

Analyst: Scott Kessler

S&P thinks RealNetworks will be adversely affected by the new collaboration of AOL Time Warner and Microsoft that was announced after Thurday's close. For example, S&P expects AOL 9.0, which is being released this fall, will include Microsoft's Windows Media Player in addition to the RealOne Player. Beta versions of 9.0 have also included Apple's QuickTime. Perhaps more significantly, the AOL/Microsoft news supports S&P's belief that the paths of RealNetwork and AOL -- an important partner -- are diverging. In addition, RealNetwork's CFO is departing next month and S&P expects a 2003 per-share loss.

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