S&P Lowers McKesson to Hold

McKesson (MCK ): Downgrades to 3 STARS (hold) from 5 STARS (buy)

Analyst: Phillip Seligman

S&P expects better operating margin comparisons in McKeson's drug-supply segment as soon as year-ago comparisons reflect fewer acquisition opportunities. Still S&P notes below-peers September-quarter comparisons for this provider of software and solutions to the health-care industy. For meaningful profit progress, S&P believes the Medical/Surgical segment will need an acquisition that has a sizable customer base. S&P doesn't see McKesson's stock showing strength until its earnings look poised to rise. S&P is cutting the 12-month target price by $6 to $32, based on a forward price-earnings- to-growth ratio of slightly under 1.0, assuming 13% earnings per share growth in fiscal 2005 (Mar).

Talbots (TLB ): Maintains 2 STARS (avoid)

Analyst: Marie Driscoll

Talbots reported third-quarter earnings per share of 60 cents, vs. 63 cents, beating S&P's estimate of 58 cents as it managed general and administrative expense frugally in a soft sales environment. Importantly, Talbots beefed up marketing for the fourth quarter, which it's starting a week earlier this year, and is increasing mailings by 90% to generate more traffic. S&P believes the retailer's merchandise selection is a work in progress, and S&P is beginning to see more relevancy in its products. S&P continues to expect weak same-store and earnings comparisons for a few quarters and would avoid shares. S&P still sees fiscal 2004 (Jan.) and fiscal 2005 earnings per share of $1.90 and $2.09, respectively.

Cost Plus (CPWM ): Reiterates 3 STARS (hold)

Analyst: Jason Asaeda

The casual home-goods retail chain posted October-quarter operating earnings per share of 4 cents, vs. 3 cents -- a penny per share above S&P's estimate, reflecting well-managed expenses. With lower distribution costs and inventory controls driving gross margin expansion, and with Cost Plus facing easier same-store sales comparisons, which should improve the expense leverage, S&P is lifting the fiscal 2004 (Jan.) operating earnings per share estimate by 1 cent, to $1.55, and raising fiscal 2005's estimate by 2 cents, to $1.86. Shares trade at p-e-to-growth of 1.2, in line with peers and 35% above the S&P SmallCap 600. S&P's 12-month target price of $50, raised from $44 assumes the p-e premium will continue.

United Parcel (UPS ): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: James Corridore

Nearing the end of 2003, S&P is shifting focus in the way it values package-delivery company UPS. With the strengthening U.S. economy aiding revenues and boosting investor interest in shipping companies, S&P thinks UPS can attain a p-e of 28 times forward earnings, in line with the high end UPS' p-e range in prior economic cycle upswings. Applying that p-e to S&P's 2005 earnings per share estimate of $3.20 provides a 12-month target price of $90, raised from $76, representing a potential 25% upside. S&P's upgrade also reflects a view of strengthening industry demand and strong cash from operations.

Charles Schwab (SCH ): Maintains 2 STARS (avoid)

Analyst: Robert Hansen

Discount broker Schwab plans to acquire Soundview Technology (SNDV ) for about $321 million in cash. The deal is expected to close in the first quarter of 2004, subject to necessary approvals, and Schwab sees the deal as earnings per share neutral in 2004, and slightly accretive in 2005. S&P thinks the move is poorly timed amid regulatory issues, and also expensive, given the level of organic growth opportunities and SoundView's narrow technology-research focus. S&P also thinks Schwab has lost its competitive differentiation as a discount broker as it moves toward full-service brokerage services. S&P is keeping its earnings per share estimates, but is cutting the target price to $10, from $11, which gives shares a p-e of 20, based on the 2004 earnings per share estimate.

General Electric (GE ): Maintains 3 STARS (hold)

Analyst: Robert Friedman

GE's decision to spin-off most of its life- and mortgage-insurance operations is consistent, with CEO Jeff Immelt's desire to jumpstart 10%-plus earnings per share growth. But, S&P sees low probability that GE will be able to achieve that level of earnings growth over the long term, mostly due to its enormous capital base and premium prices paid for recent acquisitions -- plus the rising risk profile and questionable economics of GE's new ventures. Also, S&P calculates GE's seven-year historical earnings per share growth rate has been 8%. S&P's discounted cash flow 12-month target price remains $30.

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