S&P Says Hold R.J. Reynolds

R.J. Reynolds (RJR ): Maintains 3 STARS (hold)

Analyst: Anishka Clarke

The tobacco manufacturer's second-quarter earnings per share of 83 cents after a 40-cent restructuring charge, vs. a year-ago's $2.29, is a penny below S&P's estimate. Top-line results benefited from a $54 million non-cash item related to a revised policy on returned goods. Shipment volume fell 11%, vs. a 2.5% decline for the tobacco industry. Promotional spending supported the full-price retail share, up 0.17 points. S&P sees deep-discount competition and higher promotional spending weakening margins further. At 11 times S&P's 2004 earnings per share estimate of $3.14 -- a premium to rival Altria -- S&P thinks R.J. Reynolds is fairly valued, given its 11% dividend yield and sharp discount to the S&P 500.

McDonald's (MCD ): Maintains 3 STARS (hold)

Analyst: Dennis Milton

The world's largest burger chain posted June-quarter earnings per share of 37 cents vs. 39 cents -- in line with S&P's estimate. Revenue jumped 11%, driven by worldwide same-store sales growth of 1.2%, more stores in operation, and a weaker U.S. dollar. Results were hurt by higher restaurant operating expenses and increased promotional costs. At 15 times S&P's 2003 earnings per share estimate of $1.40, and 14 times S&P's 2004 earnings per share estimate of $1.58, shares trade at a discount to the S&P 500. However, S&P believes the current valuation adequately reflects the company's moderate long-term growth prospects.

Verizon Communications (VZ ): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Todd Rosenbluth

Verizon posted earnings per share of 69 cents vs. 77 cents before one-time charges -- 2 cents ahead of S&P's estimate. S&P is encouraged by the 1.3 million net wireless adds, the best in S&P's U.S. coverage group, and gains in long distance. S&P is concerned with the 3.7% decline in access lines and expects the pressure to persist with AT&T's local offering rollouts. Margins narrowed to 42% but remain wider than peer SBC's. S&P sees risks from potential strikes and Verizon's earnings quality (pensions). However, S&P see strength in Verizon vs. peers and would hold its shares, near S&P's 12-month target price of $34.

Priceline.com (PCLN ): Maintains 3 STARS (hold)

Analyst: Scott Kessler

Shares are lower Tuesday following an announcement after Monday's close that it would offer up to $125 million in convertible bonds. We perceive Priceline's balance sheet as one of its strengths, with $149.2 million in cash and investments and no debt as of June 2003. In S&P's view, the new funds would enable further expansion of Priceline's travel offerings in the retail area and abroad. However, S&P sees this move as indicative of the intense competition in online travel. Despite recent momentum, with p-e and p-e-to-growth above peers', S&P is keeping hold.

Affiliated Computer Services (ACS ): Maintains 5 STARS (buy)

Analyst: Richard Stice

Affiliated Computer posted June-quarter earnings per share of 60 cents, vs. 49 cents -- a penny above S&P's estimate. Revenues increased 18%, led by 14% internal growth. June-quarter new business signings totaled $145 million of annualized revenue. Operating margin widened approximately 20 basis points to 13.8%. June-quarter free cash flow was $123 million. The company is in late-stage discussions to divest a portion of its federal government segment and purchase a commercial information-technology business. Affiliated Computer believes potential transactions would be non-dilutive to fiscal 2004 (June) earnings per share.

American Express (AXP ): Maintains 3 STARS (hold)

Analyst: Robert McMillan

Second-quarter earnings per share were 59 cents vs. 51 cents, 3 cents above S&P estimate. Continued strength in the travel related services business and an improvement in the financial advisory business on higher investment income and insurance premiums helped; S&P is looking for continued growth from these businesses as well as the international bank. S&P is raising the earnings per share estimates to $2.29, from $2.25, for 2003, and to $2.60, from $2.51 for 2004. S&P thinks shares, trading at 19.7 times S&P's 2003 earnings per share estimate, above S&P's projection of long-term earnings per share growth of 12-15%, will perform in line with the market.

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