S&P Cuts Whole Foods to Avoid

Whole Foods Market (WFMI ): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Joseph Agnese Our downgrade is based on valuation. Recent price appreciation has pushed shares above our 12-month target price of $86, which is based on our discounted cash-flow and p-e analyses. Although we continue to believe Whole Foods is well positioned to achieve our long-term EPS growth estimate of 17%, we believe near-term valuation may come under pressure because the company faces more difficult comparisons in first half of fiscal 2005 (Sep.). Fiscal 2004 results had benefited from increased customer traffic due in part to a labor union strike at major supermarket retailers in Southern California.

Delta Air Lines (DAL ): Maintains 3 STARS (hold)

Analyst: Richard O'Reilly, CFA; James Corridore

According to Reuters, CEO Gerald Grinstein says Delta cannot survive as is, and notes that its access to capital markets has "virtually disappeared." He also says that the company's fuel costs in 2004 will rise $670 million, largely from higher prices. Grinstein expects to complete a company review by late August. We think bankruptcy is unlikely, given our expectation that Delta will eventually reach an agreement with its pilots to reduce pay levels. The company had cash of $2.2 billion at end of March. We think its stock price already discounts much of the problems Delta faces.

Callaway Golf (ELY ): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Jason Asaeda

Callaway cuts its 2004 sales outlook to $975 million to $990 million from $1.0 billion to $1.06 billion, and cut its EPS guidance to 15 cents to 25 cents, from 82 cents to 97 cents, including estimated charges of 25 cents. It cited soft sales of titanium drivers, ongoing weakness in Japan, and higher projected losses from Top-Flite operations. While Callaway says it has initiated corrective actions, we are skeptical, based on our view of its poor operating history. We are lowering our 2004 operating EPS estimate to 40 cents from $1.17, and cutting 2005's to 91 cents from $1.41. We are trimming our 12-month target price to $11, from $18, based on forward p-e and discounted cash-flow analyses.

Oracle (ORCL ): Maintains 4 STARS (accumulate)

Analyst: Jonathan Rudy, CFA

May-quarter EPS of 19 cents, vs. 16 cents, is two cents better than our estimate. Revenue growth of 9% was also better than our estimate. Database-technology revenue was particularly strong, in our opinion, with 13% growth, but applications revenue was disappointing to us with a decline of 4%. Oracle's operating margin widened to 46% from 45%. We are raising our fiscal 2005 (May) EPS estimate to 56 cents from 54 cents. With about $8.6 billion in cash and investments, little debt, and with shares trading at a discount to peers at 22 times our calendar 2004 EPS estimate of 54 cents, we believe that the shares remain attractive.

Best Buy (BBY ): Maintains 5 STARS (buy)

Analyst: Amrit Tewary

Best Buy posted May-quarter EPS from continuing operations of 34 cents, vs. 21 cents, a penny better than our estimate. As reported on June 3, revenues rose 17% on the addition of 84 new stores and a same-store sales gain of 8.3%. Operating margin improved to 3.4% from the year-ago 2.4% on greater expense leverage and cost-saving initiatives. Best Buy expects Aug-quarter EPS of 47 cents to 52 cents. We are keeping our EPS estimates for the August quarter at 51 cents, for full-fiscal 2005 (Feb.) at $2.93, and for fiscal 2006 at $3.51. We are maintaining our 12-month target price of $67, based on our historical p-e model.

Lennar (LEN ): Maintains 3 STARS (hold)

Analyst: Michael Jaffe

Lennar posted $1.22 May-quarter EPS, vs. $1.02, 2 cents above our view. The company closed 4% more home sales, and average prices grew 5%, but a big part of the gain was from higher land sales. Unit orders rose 17%. We are raising our fiscal 2004 (Nov.) EPS estimate by 10 cents to $5.50, and still see $6.15 in fiscal 2005. At seven times our fiscal 2005 estimate, Lennar is in line with peers. Based on likely Fed rate hikes, we are negative on builders, but with operations in what we see as demographically favorable areas, and complementary marketing, we would hold Lennar. Our target price is $49, or eight times our fiscal 2005 forecast.

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