S&P Ugprades Reliant Resources to Buy

Reliant Resources (RRI ): Upgrades to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Craig Shere

Given Reliant's recent resolution of gaming allegations surrounding the California energy crisis for just $836,000, S&P believes regulatory risks are dissipating for this deeply depressed energy merchant. In January, Reliant also resolved Federal Energy Regulatory Commission charges that it improperly idled plants and in May resolved an Securities and Exchange Commission investigation into round trip trading. S&P believes Reliant's shares will rebound once its new management discloses the 2004 guidance. Reliant shares trade well below peers, based on both p-e and price-to-book multiples. Using discounted cash flow analysis, S&P arrives at a 12-month target price of $10.

Hot Topic (HOTT ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Jason Asaeda

Hot Topic raised its October-quarter earnings per share guidance to 26 cents from 25 cents (adjusted to reflect a recent 3-for-2 split) after August same-store sales rose 11.8% on top of last year's 5.3% gain. S&P is boosting the October-quarter and full fiscal 2004 (Jan.) earnings per share estimates by 3 cents each, to 27 cents and 89 cents, respectively. This comes as S&P also increases the projection of October-quarter sales to $161 million from $157 million, and now anticipates improved expense leverage on stronger same-store sales. For fiscal 2005, S&P sees earnings per share of $1.05. S&P's 12-month target price of $29 reflects the expectation that Hot Topic's p-e premium to the S&P 500 Index will continue.

TJX Companies (TJX ), Federated Dept. Stores (FD ) and Pacific Sunwear (PSUN ): Maintains 4 STARS (accumulate)

Analyst: Jason Asaeda, Michael Driscoll

Retailers that are offering the strongest value propositions, in S&P's view, attracted the most back-to-school dollars. Teen apparel stores largely posted disappointing results as consumers apparently sought out similar styles at lower prices elsewhere. Surprisingly, few retailers reported the August 14 northeast power outage had materially impacted sales. S&P looks for September sales to provide a clearer picture of back-to-school demand. For these reasons, S&P would accumulate TJX, operator of TJ Maxx stores and Marshall's; Federated, which owns Macy's; and teen retailer Pacific Sunwear.

Pfizer (PFE ): Reiterates 4 STARS (accumulate)

Analyst: Herman Saftlas

Pfizer lowered its guidance for 2003 earnings per share (GAAP basis) to 70 cents, from 86 cents, reflecting higher expenses than expected related to inventories at recently acquired Pharmacia. However, the drugmaker reiterated its projections for adjusted earnings per share of $1.73 for 2003, and $2.13 for 2004. The share price was recently hit by concerns about new rivals to Viagra and Lipitor, as well as about Lipitor patents. However, S&P believes the competition is manageable and the Lipitor patent estate is strong. S&P's 12-month target price is $37, supported by S&P's forward price-to-earnings and discounted cash-flow analyses.

Procter & Gamble (PG ): Reiterates 5 STARS (buy)

Analyst: Howard Choe

Continuing a year-long trend, P&G raised its guidance for the upcoming quarter, citing better volume growth than expected, led by healthcare products and the higher initial sell-in of the over-the-counter version of Prilosec. It now sees September-quarter organic sales growth of 9% to 11%, up from 7% to 10%. It also expects its acquisition of hair care products outfit Wella to be earnings neutral in fiscal 2004 (ending June). S&P is raising the September-quarter earnings per share estimate to $1.25 from $1.23 and the estimate for fiscal 2004 to $4.53 from $4.51. With a view of continued strong momentum, S&P would purchase P&G shares at 18 times the calendar 2004 estimate, in line with peers and below the target price of $108.

Callaway Golf (ELY ): Reiterates 2 STARS (avoid)

Analyst: Anishka Clarke

Callaway has won the bidding competition for the assets of Top-Flite Golf over rivals including Adidas-Salomon AG. The proposed $125 million transaction will be submitted to the U.S. Bankruptcy Court on Sept. 4 for final approval. This purchase could provide production scale economies for Callaway's unprofitable golf ball business, but with no earnings visibility on Top-Flite, S&P remains wary. With the stock trading at 15 times S&P's 2004 earnings per share estimate of $1.05, above peers and S&P's 12-month target price of $14, and given S&P's weak view of the company's medium-term prospects, S&P would continue to avoid Callaway shares.

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