S&P Says Accumulate Pacific Sunwear

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

Analyst: Yogeesh Wagle

The specialty-apparel retailer reported that June sales increased 22% over the prior year's period. Same-store sales rose 13.4%, led by 23.1% growth at its d.e.m.o. stores. Pacific Sunwear same-store sales were up 12.5%, with double-digit gains in girl's apparel, footwear, and accessories. Guy's apparel sales were slightly positive. The company also raised its July-quarter earnings per share guidance by 3 cents, to 23 cents. At a p-e-to-growth multiple of about 0.9 on S&P's $1.31 fiscal 2004 (Jan.) earnings per share estimate, and a 22%-24% three-year earnings growth projection -- below the S&P MidCap 400 -- S&P believes the shares have appeal.

Roadway (ROAD ): Reiterates 3 STARS (hold) and Yellow Corp.: Downgrades to 4 STARS (accumulate) from 5 STARS (buy)

Analyst: James Corridore, Bryon Korutz

Roadway agreed to be acquired by Yellow in a half-cash, half-stock deal worth about $966 million, or $48 per Roadway share, which is a 60% premium to Roadway's closing price. The proposed deal is expected to close by yearend, assuming the necessary approvals. S&P initially believed that the deal would help reduce industry overcapacity, but is disappointed to hear that Yellow plans initially to combine the back offices and leave Roadway's trucking operations independent. Though the deal should be slightly accretive in 2004, S&P says Yellow's offer, at 19 times S&P's 2003 EPS estimate for Roadway, is above peer valuations.

ArvinMeritor (ARM ) and Dana Corp. (DCN ): Reiterates 3 STARS (hold)

Analyst: Efraim Levy

ArvinMeritor plans a tender offer of $15 cash per share of Dana Corp., or about $2.2 billion. In addition, it would assume about $2.2 billion in net debt and minority interests (accounting for Dana Credit on an equity basis). Dana's management has rejected the bid. But given what ArvinMeritor believes are the potential strategic and financial benefits of the proposed deal, ArvinMeritor said it would consider a higher offer if discussions showed it to be warranted. Given the sizeable debt on both companies' balance sheet, S&P is surprised by the offer.

EMC Corp. (EMC ) and Legato Systems (LGTO ): Maintains 3 STARS (hold)

Analyst: Richard Stice, Jonathan Rudy

EMC agreed to acquire Legato Systems in a stock-swap deal valued at $1.3 billion. Each Legato holder would get 0.9 EMC share per Legato share. The deal is expected to close in the fourth quarter, subject to approvals, and be slightly accretive to EMC's 2004 earnings. Based on Monday's close, the proposed deal is priced at a 16% premium. S&P views the planned transaction as positive because it should help fill EMC's product gaps and expand its customer base. At roughly 4 times sales, S&P views the price of the deal as reasonable, given Legato's proprietary technology and product margins. But, with integration risk and shares at top of S&P's intrinsic-value range, S&P would hold shares of EMC. S&P would also hold Legato, based primarily on the hold recommendation for aquirer EMC.

Overture Services (OVER ): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Overture is trading higher Tuesday following its announcement of an expanded international search partnership with Microsoft. Overture's search results will be provided through December 2004 to users of MSN Search in the U.K., Germany, France, Japan, and South Korea. The original agreement was set to expire December 2003. Also, the MSN Search and MSN pacts now include countries with newly launched or soon-to-be-launched Overture operations. Though S&P thinks a stronger relationship with Microsoft will lead to higher revenue, S&P expects increased reliance on Microsof could negatively affect margins.

CVS Corp. (CVS ): Maintains 5 STARS (buy)

Analyst: Joseph Agnese

CVS reported second-quarter sales rose 7.6%, at the high end of S&P's expected range. Same-store sales increased 5.5% on a 7.5% rise in pharmacy and 1.4% in non-pharmacy items. S&P estimates generic substitution for higher-priced brand-named drugs had a 170-190 basis point negative impact on pharmacy comp-store sales. But, generics benefit net income because they carry wider margins than branded drugs. S&P is maintaining its second-quarter earnings per share estimate of 48 cents. With the shares trading at 15 times S&P's full-year 2003 earnings per share estimate of $1.94, below peers, and with S&P's view of favorable industry trends, S&P says buy CVS.

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