S&P Upgrades Saks to Buy

Saks (SKS ): Upgrades to 5 STARS (buy) 3 STARS (hold)

Analyst: Jason Asaeda

S&P thinks the recent weakness in Saks' shares may reflect investor uncertainty over holiday sales. S&P thinks the department-store chain is in good shape to post strong January-quarter results, given S&P's view of an upward trend in luxury spending among high-end customers and a less promotional stance. S&P is reiterating the fiscal 2004 (Jan.) earnings per share estimate of 59 cents, and is raising the fiscal 2005 estimate by 2 cents, to 70 cents, based on an expected pay-off of ongoing merchandising and service initiatives. S&P is also raising the 12-month target price to $18, from $17, based on a discounted cash-flow analysis.

McDonald's (MCD ): Maintains 3 STARS (hold)

Analyst: Dennis Milton

The world's largest burger chain announced it will sell its Donato's Pizzeria brand, exit its joint venture with Fazoli's, and discontinue development of its Chipotle and Boston Market brands outside the U.S. The company will also study the feasibility of franchising at these concepts. McDonald's expects to take a one-time charge of 23 cents to 28 cents in the fourth quarter, primarily related to these changes and to annual impairment testing. S&P is maintaining the 2003 earnings per share estimate of $1.46, excluding one-time items, and the 2004 estimate of $1.66. Also, S&P is keeping the 12-month target price of $27.

Union Planters (UPC ): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Erik Eisenstein

Citing lower mortgage volumes and pricing, Union Planters warned its 2003 earnings per share guidance is $2.51 to $2.56, with a further 5% to 10% decline in 2004, excluding a likely restructuring charge. Even after a similar warning from Washington Mutual last week, S&P is disappointed with the magnitude of this warning and thinks it could have been blunted, inasmuch as a steep decline in fourth-quarter mortgage originations had been predicted since August. S&P is cutting the 2003 earnings per share estimate to $2.56, from $2.85, and is trimming 2004's estimate to $2.42, from $2.65. Also, S&P is lowering the 12-month target price to $28, from $33.

Neiman-Marcus (NMG.A ): Upgrades to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: Jason Asaeda

S&P thinks the recent decline in the department-store chain's shares reflects profit-taking following a strong October-quarter earnings report. This sell-off presents a good investment opportunity: S&P expects Neiman's to sustain favorable sales and earnings trends in fiscal 2004 (Jul.), based on its strong luxury-product mix, a focus on full-price selling, and well-controlled inventories and expenses. S&P is keeping the operating earnings per share estimate of $3.12 for fiscal 2004, and $3.42 for fiscal 2005. The target price remains $64, based primarily on S&P's discounted cash-flow analysis.

Fannie Mae (FNM ): Reiterates 4 STARS (accumulate)

Analyst: Erik Eisenstein

Mortgage financier Fannie Mae posted November data, including a 7.9% fall in its mortgage portfolio on an annualized basis --worse than both October's 5.7% decline and S&P's expectations. Given the low yield on the purchases Fannie Mae did make, S&P agrees with their apparent restraint. Still, S&P cut the 2003 operating earnings per share estimate to $7.30, from $7.34, and trimmed the 2004 earnings estimate to $7.95, from $8.17, on results. Also, S&P lowered the 12-month target price by $2, to $79. Even with the disappointment, S&P still thinks the mortgage-to-debt ratio will widen in the coming year, leading to a resumption in Fannie Mae's mortgage portfolio growth.

Concord EFS (CE ) and First Data (FDC ): Reiterates 4 STARS (accumulate)

Analyst: Richard Stice

The companies revealed a proposed agreement with the Dept. of Justice to complete their previously announced merger. The new exchange ratio would be 0.365 of First Data shares per Concord share, down from 0.40 of First Data shares. Upon the completion of the merger, which is expected in the first quarter of 2004 pending approvals, Concord shareholders will own about 19% of the newly combined company. S&P thinks the news alleviates a major uncertainty for Concord and will likely boost its chances of renewing several bank contracts. S&P expects Concord shares to closely track the performance of First Data's shares until the merger is completed.

Dial (DL ): Reiterates 3 STARS (hold)

Analyst: Howard Choe

Consumer-products maker Dial agreed to be acquired by German-based chemicals concern The Henkel Group for $2.9 billion in cash, an 11% premium to Friday's closing price. The deal would end a three-year search by Dial for an appropriate buyer. S&P thinks the price of $28.75 per share, or 19 times S&P's 2004 earnings per share estimate of $1.52, which is a slight premium to peers, is attractive for Dial's shareholders. Dial's CEO, who has directed an impressive turnaround, is set to stay for another two years along with his management team. The acquisition is projected to close by April, 2004, pending shareholder and regulatory approvals.

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