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Enron Mail |
<<MF June 1st 2001.pdf<<
Good Friday Morning - Comments From The Local Guys! In comments made by Steve Slifer, Lehman Brothers' economist, he indicates that the U.S. economy remains in limbo - neither in recession nor in recovery. After a string of weaker-than-expected economic data, Friday's employment report came in stronger than expected. Payroll employment fell 19,000 in May, as expected, but there were large net upward revisions of 153,000 to March and April. The unemployment rate fell a tenth, to 4.4%. On the surface, this suggests strength in the economy; however, the drop was caused by a decline in the number of people looking for jobs. This is a sign of weakness, not strength. However, there has been a rise in both major measures of consumer confidence in May, and Congress passed a major tax cut, including almost a percentage point worth of economic stimulus in 3Q. All of this leaves us where we started: more near-term economic weakness and another 25 basis point rate cut by the Federal Reserve on June 27, The 30-year US T-Bond yield is 5.70%. . The 5-year is trading at 4.90%. Spot crude oil is trading at $27.90 p/b. Natural Gas - Henry Hub - is trading at $3.94 p/mcf. AD Time: New Federal Insider-Trading Rule (Rule 10b5-1) have been adopted by the SEC under the Securities Exchange Act of 1934. This rule greatly enhances an insider's/employee's ability to trade his/her corporate shares during blackout periods. Previously, without the protection of this new SEC rule, employees and insiders could safely trade only outside of designated blackout windows. Under this new rule, insiders/employees may have the ability to purchase and sell their corporate shares even during blackout periods if a written plan was established and in force when the insider/employee was not in possession of material, non-public information. The new rule contains other restrictions and should be reviewed carefully. Lehman Brothers has established a turn-key plan that take into account the regulatory procedures for establishing such a plan. Please email us or call us for more information. Lehman Brothers' Research. IMPACT CALLS Oil Services & Drilling J. Crandell, .212.526.4865 Jackups - Market Update *Net net, we will see a very positive outlook for jackup oriented companies. We continue to forecast a long cycle, with strong utilization and rising day rates over the next three or more years and highly attractive valuations. We continue our strong buy recommendation on jackup oriented companies Global Marine (GLM $25.50), Rowan Companies (RDC $29.93), Noble Drilling (NE $42.84), Ensco (ESV $32.19) and Santa Fe International (SDC $36.97) and favor those with an institutional presence. Electronics Manufacturing Services L. Miscioscia, .212.526.3472 Long Term Just Around the Corner *As near term business signals are mixed and stocks remain volatile, we're taking a 12 month view that trends for EMS in 02 will be improve significantly. Thus we're becoming more positive on the outlook for share price appreciation longer term, given the current risk reward scenario. *Our optimism is based on the high level view that U.S. macro economic trends will strengthen in early 02. While we could see further weakness in share prices near term, investors will want to position themselves for the eventual rebound, and calling the bottom has been very difficult. *From a micro sense we believe top-tier EMS cos could achieve 20% top and bottom line growth in 02, y/y, from new outsourcing wins. Well above many tech end markets. Thus, EMS could become one of the favored groups within tech. FOCUS STOCKS Altera Corp(ALTR) 3 - Market Perform D. Niles, .415.274.5252 Guidance Lowered Yet Again; International Getting Worse (C) OLD NEW STREET P/E Price: $24.00 EPS 2000 N/A $0.96 N/A N/A 52 Wk Ra: $67 - 19 EPS 2001 $0.50E $0.45E $0.47E 53.3 Mkt Cap: $9.7B EPS 2002 $0.65E $0.60E $0.62E 40.0 FY: 12/31 Price Target N/A N/A Rank 3 3 *Q2 is even worse than we thought due to international, especially Europe, deteriorating worse than expected. We believe this will be a pattern across the industry. Revs are now forecast down 25% not 20% q/q which is worse than the Q1 decline of 22%. Another indication that it is still to early to return to semis. *The book-to-bill is still well below 1.0 which implies Q3 revs will decrease q/q as we previewed. Though orders were somewhat better for the past several weeks, this is not a trend. April also started off well. *Operating margins will probably decrease from 41% in Q2:00 to 18% in Q2:01 assuming layoffs which we believe must be announced soon. *Design wins are positioning Altera well for a recovery when the inventory is gone but the bigger question is how long will that take and what is the slope of that recovery. We are cutting FY01 EPS from $0.50 to $0.45 and FY02 from $0.65 to $0.60. Demand during the summer will determine the direction of the next estimate change. McLeodUSA Inc(MCLD) 1 - Strong Buy D. Zito, .202.452.4748 Perspective Check (C) OLD NEW STREET P/E Price: $4.61 EPS 2000 N/A -$0.90 N/A N/A 52 Wk Ra: $27 - 5 EPS 2001 -$1.18E -$1.19E -$1.26E N/A Mkt Cap: $2.8B EPS 2002 -$1.21E -$1.21E -$1.05E N/A FY: 12/31 Price Target $10 $10 Rank 1 1 *While near term catalysts are tough to identify, we believe revised near term expectations are achievable and that company specific bad news is behind us, providing a relatively attractive entry point for long term investors. *Management, in our opinion, is doing the right things in this environment, namely focusing effort and investment on its in-region operations, paring back cap ex, reducing headcount, and increasing cost controls. *Actions indicate a management team that recognizes the realities of the macro-environment and is focused on delivering EBITDA and cashflow, with an implied willingness to forego some near term revenue opportunities to do so, if necessary. *Shares currently trade at 2.7x 2002E revenue. Our valuation analysis suggests potential upside of approximately 60% versus downside of 23% from these levels. COMPANY/INDUSTRY UPDATES Brokers & Asset Managers M. Constant, .415.274.5379 Brokerage Stocks: What Do We Do Now? *In the aftermath of the recent rally in brokerage stocks (our Brokers Index is up 13% since our upgrades on 19-Mar-01 versus a roughly 8% rise in the S&P 500 index), we are frequently asked whether or not we would advise "taking gains" at current trading levels. In our view, some of these stocks have begun to discount a fundamental recovery that is not yet fully substantiated by market conditions; however, the intermediate-term outlook has become somewhat more favorable and (perhaps more importantly) current valuations of certain stocks in our coverage universe still leave room for incremental upside appreciation potential over the next year or more, particularly after the modest pull-back that the group experienced over the last week and a half. Equity Derivatives/Quant Research J. Hosker, .212.526.7460 Weekly Volatility Commentary *We recommend buying the underlying index and/or selling implied volatility on the Utility (UTY) index and Semiconductor (SOX) index. We recommend selling the underlying index and/or buying implied volatility on the S&P 500, UK FTSE 100, the Banking (BKX) index, the Pharmaceutical (DRG) index, the Morgan Stanley Consumer (CMR) index, the Airline (XAL) index and the Gold/Silver (XAU) index. *Near-term one-month at-the-money (ATM) implied volatility for the S&P 500 index increased this week as the market sold off among concerns about the timing of a potential recovery. One-month ATM implied volatility for the NASDAQ 100 (NDX) index increased as the index fell triggered by a reduced profit forecast by SUNW. We believe that the SPX and NDX will build a base with interest rate cuts. Liz Claiborne(LIZ) 1 - Strong Buy R. Drbul, .212.526.4714 Compelling Valuation; Executing Diversification Strategy OLD NEW STREET P/E Price: $51.77 EPS 2000 N/A $3.58 N/A N/A 52 Wk Ra: $53 - 34 EPS 2001 $4.05E $4.05E $4.05E 12.8 Mkt Cap: $2.7B EPS 2002 $4.55E $4.55E $4.55E 11.4 FY: 12/31 Price Target $62 $62 Rank 1 1 *We are reiterating our 1 Strong Buy rating and 12 month price target of $62 on Liz Claiborne. We believe the company is making significant strides towards its goal of becoming the worlds leading branded fashion apparel company. The company's recent acquisition of the Mexx Group greatly accelerates the company's diversification strategy as it increases Liz Claiborne's presence in international markets to 17% on a pro forma 2000 basis compared to 7% prior to the acquisition. *On a valuation basis, Liz Claiborne appears very attractive as it is trading at a 16% discount on a P/E basis and a 31% discount on an EV/EBITDA basis to its leading competitor, Jones Apparel Group. *Over the past six months, Liz Claiborne has lost three key senior executives. While we believe the company continues to effectively manage its business and have a high level of confidence in CEO Paul Charron, we recognize that the uncertainty in senior management is unsettling and believe the clarification of the situation could be a catalyst for the shares. Starbucks Corp(SBUX) 2 - Buy M. Speiser, .212.526.3255 May Comps at upper-end of our view/Rev's lower-end (C) OLD NEW STREET P/E Price: $19.52 EPS 2000 N/A $0.36 N/A N/A 52 Wk Ra: $26 - 16 EPS 2001 $0.46E $0.46E $0.46E 42.4 Mkt Cap: $7.5B EPS 2002 $0.58E $0.58E $0.57E 33.7 FY: 9/30 Price Target $25 $25 Rank 2 2 *May Comps of 3% were at the upper-end of our forecast but Rev's of 20% were at the lower-end of targets. Maintain 2-rating & view that near-term upside is limited given lack of visibility on Comps/Top-line momentum *Comps of +3% were at the upper-end of our +1-3% view & targets. Traffic & Avg check Up. With about 2 1/2% Pricing, Mix was probably down *Rev's +20%, below our 22-24% view; this was at the low-end of mgmts target & the 2nd month in a row of light Revs; this will likely be focused on *In June, expect 22-24% Revs on 1) 22% Co-Op Unit grth & 2) Comps of +1-3% - vs 9% a yr-ago - on about 2% Pricing - about 1/2% burned in May, & 0-1% Traffic; Traffic comparison similar to May *Maintain 2-rating. At 36x, Rev's just meeting targets, Comparisons difficult, No price hikes & Retail environment still slow/uncertain, near-term upside is limited. But maintain EPS view as Int'l is solid & lower coffee costs to drive margins Ulticom Inc(ULCM) 1 - Strong Buy T. Luke, .212.526.4993 Strong 1Q Beats Expectations Once Again; Reit 1 Strong Buy (A,C) OLD NEW STREET P/E Price: $25.12 EPS 2000 N/A $0.22 N/A N/A 52 Wk Ra: $63 - 13 EPS 2001 $0.38E $0.41E $0.22A 61.3 Mkt Cap: $1.1B EPS 2002 N/A $0.48E $0.38E 52.3 FY: 1/31 Price Target $60 $60 Rank 1 1 *Last night, service enabling software leader and our top small cap pick Ulticom once again exceeded estimates across all key metrics. We reiterate our 1 Strong Buy rating. *Revenues of $17.0M easily exceeded our $16.1M estimate, driven by continued strong sales into the softswitch (Internet offload and VoIP) and wireless application markets. *EPS of $0.10 exceeded our est of $0.09 despite lower interest income, on higher gross margins of 68.2%, vs. 67.9% in 4Q00. ULCM continues to add functionality to Signalware, boosting margins. *Visibility at the company remains good, with backlog continuing to exceed one Q of revenue. *We believe the outlook for ULCM remains robust given continued growth in the softswitch and wireless markets. Indeed, management chose to raise guidance during the call. Our estimates move to $72.8M/$0.41 from $70.9M/$0.38 in 2001 and to $98.3M/$0.48 from $95.7M/$0.44 in 2002. David C. Morris Sr. VP Lehman Brothers 713-652-7112/800-227-4537 dcmorris@lehman.com Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. G-The Lehman Brothers analyst who covers this company also has position in its securities. Key to Investment Rankings: This is a guide to expected total return (price performance plus dividend) relative to the total return of the stock's local market over the next 12 months. 1 = Strong Buy (expected to outperform the market by 15 or more percentage points); 2=Buy (expected to outperform the market by 5-15 percentage points); 3=Market Perform (expected to perform in line with the market, plus or minus 5 percentage points); 4=Market Underperform (expected to underperform the market by 5-15 percentage points); 5=Sell (expected to underperform the market by 15 or more percentage points). This document is for information purposes only. We do not represent that this information is complete or accurate. All opinions are subject to change. The securities mentioned may not be eligible for sale in some states or countries. This document has been prepared by Lehman Brothers Inc., Member SIPC, on behalf of Lehman Brothers International (Europe), which is regulated by the SFA. ?Lehman Brothers, Inc. ------------------------------------------------------------------------------ This message is intended only for the personal and confidential use of the designated recipient(s) named above. If you are not the intended recipient of this message you are hereby notified that any review, dissemination, distribution or copying of this message is strictly prohibited. This communication is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of Lehman Brothers. Email transmission cannot be guaranteed to be secure or error-free. Therefore, we do not represent that this information is complete or accurate and it should not be relied upon as such. All information is subject to change without notice. - MF June 1st 2001.pdf
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