S&P Upgrades Abbott Laboratories to Accumulate

Abbott Laboratories (ABT ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Frank DiLorenzo

Abbott announced a plan to spin off its global hospital products business, which it expects to accomplish in the first half of 2004. It estimates the new company will have $2.5 billion in sales and $300 million net income. S&P thinks the proposed move makes sense because of the slower growth of Abbott's hospital business, vs. its pharmaceuticals. S&P's upgrade is predicated as well on the expectation of improvements in diagnostics and nutritional sales in 2004, plus continued strength in pharmaceuticals. Based on S&P's discounted cash flow analysis, S&P thinks Abbott is undervalued, and has a 12-month target price of $46.

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

Analyst: Erik Eisenstein

Friday's Wall Street Journal reported that Freddie Mac, under regulatory pressure, is "on the verge" of replacing its new CEO, Greg Parseghian. Freddie Mac confirms it has met with the Office of Federal Housing Enterprise Oversight, which oversees Freddie Mac, to discuss the regulator's concerns, but describes talk of any resolution as "speculation" and "premature". In S&P's view, the new CEO and former chief investment officer has become an increasing political liability since Freddie Mac's internal investigation revealed the extent of his involvement with events leading to ongoing accounting controversy.

Goodyear Tire (GT ): Maintains 2 STARS (avoid)

Analyst: Efraim Levy

Goodyear says operating income in its key North American tire business fell year-to-year in July due to higher raw materials and conversion costs, lower original equipment volume, and higher wage and benefits costs. Recently, the company announced a tentative contract agreement with the United Steelworkers of America. Although the terms were not disclosed, this should prevent a strike and help Goodyear in its restructuring efforts. S&P expects a loss and negative cash flow in 2003. With a leveraged balance sheet and weak earnings outlook, S&P would avoid the shares.

Intel (INTC ): Maintain 5 STARS (buy)

Analyst: Thomas Smith

Intel raised the guidance for third-quarter revenue to $7.3 billion to $7.8 billion, from the prior $6.9 billion to $7.5 billion, above S&P's estimate of $7.2 billion. Gross margin is guided to 56%, from 54%, both plus or minus 2%; S&P estimates 54%. The chipmaker's processor business is trending stronger while its communications (flash memory) business remains soft. S&P's 12-month target price is $32, on discounted cash flows and forward p-e analysis. S&P has a positive outlook on the semiconductor industry, based on S&P's projection of a cyclical upturn through 2005. S&P is currently reviewing its estimates.

Best Buy (BBY ): Maintains 5 STARS (buy)

Analyst: Amrit Tewary

The consumer-electronics retailer announced a new long-term incentive program for its U.S employees that links their rewards to the company's total return to shareholders over the long term. S&P notes that the new program, which consists of restricted shares and stock options, is expected to be less dilutive to shareholders than the earlier plan. S&P believes the program should strengthen Best Buy's long-term performance and increase retention of key employees. At 21 times S&P's fiscal 2004 (Feb.) earnings per share estimate of $2.45, shares are at a premium to the S&P 500 but at a discount to Best Buy's average historical p-e.

Borders Group (BGP ): Maintains 3 STARS (hold)

Analyst: Jason Asaeda

Borders posted July-quarter operating earnings per share of 7 cents vs. 4 cents, 6 cents above S&P's estimate and 5 cents above the Street. Sales grew 8% on strong demand for Harry Potter books. Profits benefited from improved sales leverage in all business segments and cost controls, which were partly offset by bestseller discounts. S&P is adjusting the fiscal 2004 (Jan.) earnings per share estimate up by only 4 cents, to $1.48, since S&P projects slightly lower sales growth in the back half on weaker demand for DVDs and music. Given S&P's cautious near-term outlook for book sales, S&P views Borders as fairly valued at a discounted p-e to the S&P 500.

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