S&P Says Buy Affiliated Computer Services

Also: analysts' opinions on Humana, Gannett, and Vodafone

Affiliated Computer Services (ACS ): Maintains 5 STARS (buy)

Analyst: Richard Stice

Affiliated Computer shares dropped Monday after an unconfirmed report regarding a "welfare to work" contract with the State of Florida. A recent audit alleges that certain ACS employees may have inflated the number of people transitioned into employment, as well as their salary levels. S&P views the news as a bit disappointing, but doesn't think it will result in a cancellation of the deal. Moreover, S&P notes that the entire contract amounts to 1% of S&P's $4.2 billion fiscal 2004 (June) revenue estimate. S&P sees the shortfall as an overreaction and regards it as an enhanced buying opportunity.

Humana (Humana ): Maintains 5 STARS (buy)

Analyst: Phillip Seligman

Fourth-quarter earnings per share of 41 cents, vs. 34 cents is a penny above S&P's estimate. Humana performs well in the commercial space, and the health-benefits company thinks its self-directed plans are gaining interest. Humana sees 2004 revenue up 6.5%, and sees 6% to 9% organic growth in members. The company also sees its medical cost ratio rising on a shift of a large, low-cost risk account to administrative services status, but says its selling, general, and administrative expense ratio is expected to ease despite more administrative service members. S&P sees rising industry valuations on fundamentals and industry consolidation, and thinks the forward price-earnings merits a rise to 17 from 15. S&P's 2004 earnings per share estimate is $1.66. S&P is raising the target price to $28, from $25.

Gannett (GCI ): Maintains 5 STARS (buy)

Analyst: William Donald

Fourth-quarter earnings per share of $1.31, vs. $1.29 is in line with S&P's estimate, as revenue rose 6%. Newspaper operations saw 10% higher ad revenue and an 8% rise in operating profits, offsetting lower TV revenue and profit on a sharp drop in political ads. Due to S&P's view of a tentative outlook for retail ad demand in the first half, S&P is shaving 15 cents from the 2004 estimate, to $5.15 -- up 15% from 2003's $4.46. S&P sees a 17% gain to $6.00 for 2005. At 16 times and 14 times S&P's 2004 and 2005 estimates, Gannett trades well below peer p-e averages. S&P's 12-month target price of $106 assumes a below-peer p-e of 21 times S&P's 2004 estimate.

Vodafone (VOD ): Upgrades to 3 STARS (hold) from 2 STARS (avoid)

Analyst: Todd Rosenbluth, Sanjeev Gupta

Vodafone's key performance indicators for the December quarter, released last week, suggests better-than-expected customer growth on the back of impressive growth in Italy and Germany. The company has indicated that it's looking at all options in the U.S. S&P see Vodafone's likelihood for swapping its minority holding in Verizon Wireless for a majority in AT&T Wireless as small, though S&P thinks Vodafone can afford such a transaction. Given recent weakness in the U.S. dollar and S&P's relative valuation analysis, S&P is raising the sum-of parts valuation and the target price to $28, from $20.

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