S&P Upgrades Humana to Buy

Humana (HUM ): Upgrades to 5 STARS (buy) from 3 STARS (hold)

Analyst: Phillip Seligman

S&P thinks Humana will gain more than most other managed care companies from the proposed Medicare drug benefit, given its relatively large Medicare membership. Although the 12%-14% medical cost trend Humana sees in 2003 is above-peers, S&P sees reduced hospital admits -- due in part to higher co-pays -- lowering that trend. S&P thinks Humana is likely to become one of three providers for TRICARE, the military's healthcare program. All told, S&P believes Humana, which is currently trading at 11 times S&P's 2003 estimate of $1.40, vs. 14 times for peers and 18 times for the S&P 500, is poised to outperform.

Payless ShoeSource (PSS ): Downgrades to 2 STARS (avoid) from 4 STARS (accumulate)

Analyst: Yogeesh Wagle

Payless cited a continuation of disappointing sales trends from May into the first two weeks of June. Sandal sales in particular have been hurt by unseasonably cold weather. Payless expects low double-digit declines and net earnings of a nominal loss to a slight profit in the July quarter. Payless also expects that it will not be able to comply with certain debt-related covenants at the end of the quarter. S&P is reviewing its fiscal 2004 estimate. But, with sales and margin pressure likely to continue into the second half, and uncertainty surrounding Payless' plans to amend covenants, S&P would avoid shares.

General Electric (GE ): Maintains 3 STARS (hold)

Analyst: Robert Friedman

S&P doesn't believe GE's tentative labor pact with its two largest unions will have a material impact on long-term free cash earnings; S&P isn't changing its long-term free cash earnings growth assumptions for GE. S&P thinks the company's enormous asset, revenue, and equity bases materially reduces the probability of long-term, double-digit average annual free cash or earnings per share expansion. Based on S&P's projections of a sustainable, debt-adjusted average return-on-equity of 17%, S&P's free cash flow-based fair value models appraise GE at roughly $30 a share.

Tyco International (TYC ): Maintains 3 STARS (hold)

Analyst: Michael Jaffe

Tyco said it will restate its financial results for fiscal 1998 (Sep.) through the second quarter of fiscal 2003, under the Securities and Exchange Commission's ongoing review of Tyco's filings. Under the restatement, Tyco will push back $528 million of after-tax charges recorded in the first quarter of fiscal 2002 and the second quarter of fiscal 2003 into the historical periods to which they relate. These dealings seem to indicate that the SEC has agreed to the validity of Tyco's recent charges. Shares trade at 14 times S&P's fiscal 2003 estimate, a discount to the S&P 500, and has a decent group of businesses. Still, given ongoing uncertainties, S&P would only hold the shares.

Computer Sciences (CSC ): Maintains 4 STARS (accumulate)

Analyst: Richard Stice

On Monday, Computer Sciences announced that previously signed agreements with the U.S. Navy would exceed the originally estimated value by $200 million. The deal is now worth up to $700 million over the remaining 12 years of the program. S&P believes Computer Sciences remains well-positioned to take advantage of growing public sector demand for information-technology services. Based on S&P's fiscal 2004 (Mar.) earnings per share estimate of $2.86, shares trade at a discount to the S&P 500 on a p-e and p-e-to-growth basis. Given S&P's view of favorable end-market potential and an attractive valuation, S&P would advise accumulating Computer Sciences.

Freddie Mac (FRE ): Reiterates 2 STARS (avoid)

Analyst: Erik Eisenstein

In a clarification, Freddie Mac says its former Chairman and CEO, and its former President and COO did not receive "golden parachutes." Rather, the options and restricted stock referenced in previously disclosed provisions of employment agreements were pursuant to contracts signed in 1990. S&P doesn't consider this a major development, and is far more concerned about the magnitude and extent of the current accounting scandal as well as any related wrongdoing. With uncertainties persisting, S&P would continue to avoid the shares.

Motorola (MOT ): Maintains 3 STARS (hold)

Analyst: Kenneth Leon

Motorola appointed Scott Anderson, who now heads a smaller division, to run its money-losing semiconductor products sector, which S&P hopes Motorola divests when the chip cycle becomes more favorable. The good news, in S&P's view, is that less capital is being invested in this segment after several weak years; the bad news is that operating losses continue. S&P estimates an operating loss near $400 million for the segment in 2003, vs. a loss of $284 million in 2002. Trading at an enterprise value that is 0.9 times S&P's 2003 sales estimate -- below peers -- S&P would hold Motorola for a potential recovery in late 2003.

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