THREAD---LU added to A G EDWARDS focus list today ---
Lucent Technologies Inc.
Dow Jones Newswires -- February 10, 1999
A.G. Edwards Expects Market To Be In 10000 Range By
Summer
By Desiree J. Hanford
ST. LOUIS (Dow Jones)--Despite its recent volatility, the Dow Jones Industrial Average will still
likely reach the 10000 range by this summer, said Stuart Freeman, chief equity analyst for A.G.
Edwards & Sons Inc.
Freeman told Dow Jones that the stock market will reach that level once investors feel confident that
the economy will slow down and the Federal Reserve won't raise interest rates, something it typically
does late in a booming economic cycle.
Some market watchers think the Fed might raise interest rates sometime this year because of inflation
fears. But Freeman isn't concerned about that and thinks the Fed may lower rates in the second half
of the year.
"I think we'll see them hold the line until at least the second half of the year and then as things slow
down, they'll actually see some reason and be comfortable lowering it," he said. "The strength we're
seeing now in the economy is in part from cuts made last year."
Freeman expects the economy to grow between 3% and 3.5% in the first half of this year, slowing to
about 2% in the second half. He noted that the economy has been steaming along because of
consumer spending, spurred on by low inflation and low interest rates. That has allowed consumers
to refinance their mortgages, freeing money to be spent on big-ticket items like cars and household
appliances.
Although the economy will continue growing, Freeman said that, like last year, investors will have a
difficult time finding companies with solid, consistent earnings growth.
Given those expectations, A.G. Edwards recently added six companies to its focus list and removed
eight others. The additions are large-cap multinational companies with consistent earnings, and those
whose earnings growth will exceed the 7% to 8% market watchers expect from companies in the
Standard & Poor's 500 Index.
The companies recently added to A.G. Edwards' focus list are Gap Inc. (GPS), Johnson & Johnson
(JNJ), American Home Products Corp. (AHP), Coca-Cola Co. (KO), Gillette Co. (G), and Lucent
Technologies Inc. (LU).
Equity analyst Freeman said specialty retailer Gap is taking market share from other retailers thanks
mainly to its strong brand awareness. He said the San Francisco company has been successfully able
to mesh quality, style and price to attract consumers. By opening Old Navy stores, the Gap has also
attracted a more discount-oriented consumer. The company plans to open up to 150 Old Navy
stores in fiscal 1999.
"And as consumers continue to spend, we'll see stellar earnings growth," Freeman said.
The brokerage firm added two health care companies to its list Johnson & Johnson and American
Home Products. Johnson & Johnson, the world's largest maker of health care products. has annual
sales of about $23 billion from its consumer, pharmaceutical and professional businesses.
Freeman said the company, located in New Brunswick, N.J., has a solid balance sheet, including a
28% return on equity and strong cash flow generation. He said the $610 million restructuring charge
Johnson & Johnson took in the fourth quarter isn't a concern because he views it as a one-time
charge.
American Home Products is the second health care company added to the list. Freeman said the
company's return on equity is very good, and its earnings are expected to grow at an annual
compounded growth rate of about 10% through 2000.
A federal judge dismissed a class-action lawsuit that alleged that American Home Products hid
troubles with the popular diet drugs Redux and Pondimin, which were later recalled, while company
executives sold nearly $25 million in stock.
The company is located in Madison, N.J.
Freeman also likes the 28% return on equity that Murray Hill, N.J. telecom equipment maker Lucent
Technologies has. He noted the company expects to have 19% to 20% revenue growth and 35%
earnings per share growth in fiscal 1999. Freeman said the company has good and improving gross
margins and is also reducing its selling, general, and administrative (SG&A) expenses as a percentage
of revenue.
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