S&P Cuts Saks to 'Avoid'

Also: Analysts' opinions on BJ's Wholesale, Lucent Technologies, First Energy, and more

Saks Inc. (SKS ): Downgrading to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Jason Asaeda

July-quarter operating loss per share of 20 cents, vs. 14 cents loss, is 4 cents worse than our estimate. Sales were flat, with comparable-store sales down 0.6%. Results were hurt by increased promotions and a $10 million rise in SG&A expense stemming from Saks's recent sale of its credit card accounts. We are trimming our fiscal year 2004 (January) operating EPS estimate by 4 cents, to 51 cents, and see fiscal year 2005's at 60 cents. We at S&P believe its still relatively weak industry position will limit SKS's turnaround efforts in fiscal year 2004. Given the expected disappointing near-term outlook, we would avoid shares. Our 12-month target price is $11.

BJ's Wholesale Club (BJ ): Upgrading to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Jason Asaeda

July-quarter operating EPS of 31 cents, vs. 50 cents, is 1 cent above our estimate. Sales rose 14% on 6.6% gain at comp-stores. Profit was hurt by a planned decrease in merchandise margins, reflecting BJ's new consumer strategy. Given expected margin benefit from sourcing initiatives and an improving comp-store sales trend for core food and general merchandise categories, we are increasing our fiscal year 2004 (January) and fiscal year 2005 operating EPS estimates by 3 cents each, to $1.31 and $1.44, respectively. Encouraged by BJ's turnaround efforts, we think its shares have some appeal. Our 12-month target price is $23.

Lucent Technologies (LU ): Reiterates 2 STARS (avoid)

Analyst: Kenneth Leon

Lucent received an $80 million contract from KTF, a leading Korean wireless service provider, to supply a third generation (3G) CDMA network. While the company is trying to gain momentum with its wireless products and professional services, we believe LU may be falling behind its competitors. We expect LU to show a sequential improvement in sales from the depressed June quarter, but we do not see profitability until late next year. Trading at an enterprise value of 42 times our 2003 EBITDA estimate, well above its peers, we would avoid the shares.

First Energy (FE ): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Justin McCann

Despite a 9% drop in the shares on Aug. 18, S&P considers the stock vulnerable to further declines. Although it may be a while before the causes of the Aug. 14 power blackout are determined, the fact that investigations are now focused on First Energy's possible contribution have further damaged its credibility with investors. Coming on top of the pending restatement of its earnings from 2000 to the first quarter of 2003, and the costs related to the delays in having its Davis-Besse nuclear unit returned to operation, S&P thinks it could be a while before the stock recovers.

Staples (SPLS ): Reiterates 5 STARS (buy)

Analyst: Yogeesh Wagle

S&P believes Staples' focus on higher-margin small business customers and on growing its delivery operations will continue to drive industry-leading sales gains in the second half. July-quarter earnings per share of 18 cents, vs. 13 cents is a penny above S&P's estimate. Sales rose 18%, on a 6% gain in North American retail same-store sales and 14% growth in the delivery business; European retail and delivery sales rose 88%. Operating margin widened 100 basis points. S&P is raising the fiscal 2004 (ending January) estimate by 4 cents, to $1.10, and sees $1.26 earnings per share in fiscal 2005. Based on S&P's discounted cash flow model, the 12-month target price is $28.

Agilent Technologies (A ): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Agilent posted a July-quarter pro forma loss per share of 2 cents, beating S&P's 10-cent loss estimate. Earnings quality was fair, with upside from a sharp 16% quarter-over-quarter cut in selling, general, and administrative expenses. Revenues rose 8% year-over-year, to $1.5 billion, in line with S&P's model as test and measurement software rose 18% and automated test equipment sales grew 6%. Gross margin at 40% was 200 basis points below S&P's model. Agilent sees October-quarter revenues of $1.5 billion to $1.6 billion, in line with S&P's model, and earnings per share of breakeven to 10 cents, vs. S&P's 2-cent loss estimate. S&P is narrowing the fiscal 2003 (ending October) loss estimate by 10 cents, to 40 cents. At a price-to-sales ratio of 1.7, in line with the peer average, S&P says Agilent is O.K. to hold.

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