S&P Says Accumulate Southwest Airlines

Southwest Airlines (LUV ): Maintains 4 STARS (accumulate)

Analyst: James Corridore

The discount carrier posted third-quarter earnings per share of 13 cents, vs. 9 cents, which was 2 cents below S&P's estimate but in line with the Street's estimate. Revenues rose 12%, higher than S&P expected, on increased capacity, better yields, and improved loads. Costs were also higher than S&P forecasted, mainly in compensation and maintenance. S&P is encouraged by revenue trends and thinks that Southwest will keep costs stable next year. S&P is keeping the 2004 earnings per share estimate at 65 cents, and sees the 2005 earnings per share at 80 cents. Shares are trading with a price-earnings ratio of 23, based on S&P's 2005 earnings per share estimate; a premium to peers that S&P thinks is deserved, given Southwest's track record of 50 straight profitable quarters.

Cree (CREE ): Upgrades to 5 STARS (strong buy) from 3 STARS (hold)

Analyst: Mark Basham

The chip-equipment maker's September-quarter earnings per share of 12 cents, vs. 5 cents, is in line with S&P's estimate, with revenues on target as well. The results include sizable legal expenses. Still, S&P notes that a committee of independent directors found that allegations in a suit by co-founder E.Hunter lack merit, and Hunter has subsequently dropped his most serious claims against Cree. Therefore, S&P says Cree's legal costs are likely to decline, and says the litigation discount is no longer warranted. S&P is raising the 12-month target price, based on a discounted cash-flow model, to $23, from $20. S&P believes that with this hurdle removed, Cree may trade more in line with peers.

Check Point Software (CHKP ): Maintains 4 STARS (accumulate)

Analyst: Jonathan Rudy

Check Point posted third-quarter earnings per share of 23 cents, vs. 25 cents, a penny below S&P's estimate, on revenues up 3%, slightly below S&P's forecast. Gross and operating margins remained quite strong at 96% and 58%, and cash from operations was solid at $62.8 million. S&P is trimming the 2003 earnings per share estimate to 97 cents, from 99 cents, mainly on a higher tax rate than expected, and looks for $1.04 in 2004. With nearly $6.00 in cash per share, and no debt, S&P believes shares of this highly profitable Internet security leader remain attractive at a discount to peers, with shares trading at 17 times S&P's 2004 earnings per share estimate.

Citigroup (C ): Reiterates 5 STARS (strong buy)

Analyst: Stephen Biggar, Mark Morgan

The world's largest financial services firm posted third-quarter earnings per share 90 cents, vs. 74 cents, 6 cents above S&P's 84 cents estimate on strong revenue growth in retail banking, credit cards, and private banking, and on a lower-than-projected loan loss provision reflecting improved credit quality. S&P expects steady growth in Citigroup's consumer businesses and improving capital markets activities to drive double-digit earnings growth through 2004. S&P is raising the 2003 and 2004 estimates each by 10 cents, to $3.40 and $3.80, and is upping the 12-month target price to $57, from $54. This gives Citigroup a p-e of 15, based on S&P's 2004 earnings per share estimate; in line with Citigroup's long-term historical average.

Lexmark International (LXK ): Reiterates 4 STARS (accumulate)

Analyst: Megan Graham Hackett

Printer maker Lexmark posted third-quarter earnings per share of 79 cents, vs. 70 cents, before a 9 cents charge -- 10 cents above S&P's estimate. S&P view the earnings per share quality as solid, with revenues up 11%, to $1.157 billion, above S&P's estimate, and lower selling, general, and administrative expenses. Revenues were stronger as consumers bought new products, but gross margin of 32.1%, vs. 32.5%, was below S&P's model because of Lexmark's mix of more hardware products. The company sees fourth-quarter earnings per share of 85 cents to 95 cents, above S&P's 76 cents estimate. S&P is raising the 2003 earnings per share estimate by 26 cents, to $3.21. Although the p-e of 19 (based on S&P's 2004 earnings per share estimate of $3.70) is ahead of peers, S&P thinks Lexmark is undervalued, given its strong cash flow and execution.

Hasbro (HAS ): Reiterates 4 STARS (accumulate)

Analyst: Anishka Clarke

The toymaker posted third-quarter operating earnings per share of 47 cents, vs. 32 cents, sharply above S&P's 41 cents estimate. Revenue was better than S&P expected, up 18% on growth in core brands and increased shelf space. S&P sees sustained momentum going into the fourth quarter on a heightened focus on core brands and strong holiday demand. S&P is raising the 2003 estimate by 6 cents, to $1.03, and is raising 2004's estimate by 7 cents, to $1.20. As revenues continue to beat S&P's forecasts and with more cost cuts expected, S&P thinks Hasbro is attractive. Shares trade at 17 times S&P's 2004 estimate, in line with the S&P 500, and at a deserved premium to rival Mattel, in S&P's view.

3M (MMM ): Maintains 3 STARS (hold)

Analyst: James Sanders

The maker of Post-It notes and industrial adhesives reported third-quarter results of 83 cents, vs. 69 cents, 5 cents better than S&P's estimate of 78 cents, on continued margin expansion. S&P expects 3M to benefit from growth in Asia and a domestic capital spending recovery. S&P also thinks cost-cutting actions should result in better-than-average margins of 20%+. S&P is raising the 2003 and 2004 estimates to $3.06 and $3.52, from $3.00 and $3.42, respectively. After applying 3M's historical p-e to S&P's new 2004 earnings per share estimate, and blending it with S&P's discounted cash-flow model, S&P is raising 3M's 12-month target price to $71 from $67.

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