Reading the STARS -- 10/31/03
New 5-STARS this week: During the trading week ended Oct. 31, the following issues were added to Standard & Poor's list of stocks with its highest investment ranking, 5 STARS (buy). S&P analysts expect those issues to outperform the S&P 500 index by a very wide margin over the next 6 to 12 months.
• Omnicom Group (OMC ; recent price, $77)
S&P analyst William Donald upgraded the advertising giant from 4 STARS (accumulate) on Oct. 28 after the company reported third-quarter earnings per share of 72 cents, vs. 68 one year earlier, in line with his 71-cent estimate. Revenues rose 15%, helped by foreign exchange gains, acquisitions, and some internal growth. Donald notes that Omnicom's operating margin was pressured by new business costs, severance expenses, and changes in the revenue/cost mix. He sees these pressures easing, and is more confident that the 12% revenue gain he expects for 2004 will largely come from internal growth. Donald sees a 21% advance in 2004 EPS to $4.40, and a 20% rise to $5.30 for 2005. Donald says the upgrade reflects S&P's belief that its $95 12-month target price is conservative, based on discounted cash-flow.
New 1-STARS this week: These stocks joined the ranks of 1-STARS stocks -- S&P's designation for issues expected by S&P analysts to underperform the S&P 500 index by a wide margin over the next 6 to 12 months -- during the trading week ended Oct. 31:
• Marsh & McLennan (MMC ; recent price, $44)
S&P analyst Susan Dawkins downgraded the shares from 3 STARS (hold) on Oct. 31 after the Massachusetts Pension Board announced that because of concerns over internal controls, it will pull its pension funds from Putnam, a unit of Marsh. News reports suggest that California, Connecticut, and Vermont are also considering a similar action, according to Dawkins. She believe this is likely to further erode investor confidence and may create added outflows from Putnam funds. She also think these concerns could taint sentiment toward Marsh's insurance brokerage and consulting businesses. Using a "sum-of-the-parts" analysis for 2004, Dawkins sees Marsh more properly valued at $37, and recommends selling its shares.
• Massey Energy (MEE ; recent price, $14)
S&P analyst Stewart Glickman initiated coverage of Massey, the leading coal producer in the Central Appalachian area, on Oct. 29. Glickman thinks Massey should benefit modestly in the near term from rising spot-market prices, with 10% of its planned 2004 (and 40% of planned 2005) production still unpriced. However, his concerns relate to Massey's ability to improve productivity, given recent struggles and a difficult regulatory environment. Glickman notes that Massey's shares are trading above its industry peers on both a relative p-e and p-e to growth (PEG) basis, and also appear overvalued to S&P's discounted cash-flow model. With a dividend yield of just 1.1%, and an S&P 12-month target price at $11, the shares are ranked 'sell'.
• Quixote (QUIX ; recent price, $24)
S&P analyst Markos Kaminis downgraded the shares from 2 STARS (avoid) on Oct. 28 after the maker of highway-safety products announced September quarter earnings per share of 27 cents, vs. 22 cents one year earlier, 2 cents ahead of S&P's estimate. Revenues were 59% higher, benefiting from an acquisition. International sales rose 23%, but represented 10% of total revenue, notes Kamins. Citing state budgetary issues and delay in the passage of a federal highway spending bill, Quixote expressed caution about the December quarter, with EPS guidance of 18 cents to 20 cents, below S&P's low-end estimate of 22 cents and the Wall Street consensus forecast of 25 cents. With the factors underlying his concerns about state spending constraints now apparently materializing, Kaminis expects Quixote to underperform. His 12-month target price is $20.