|
|
Enron Mail |
Good Monday Morning! Abbreviated Edition. IMPACT CALLS Internet Security Israel Hernandez Company Updates/Rating Changes q Investment Conclusion: Below are specific company updates and our views on each company in our coverage universe. Reiterating our thoughts published on September 17, we believe last week's attacks are likely to cause numerous short-term disruptions that put the September quarter at risk for all the security software vendors, particularly those vulnerable to discretionary spending cuts or large deals. In light of recent events, we are adjusting our ratings on two companies. We are raising our rating on VeriSign from a 2-Buy to 1-Strong Buy based on good earnings visibility amid a generally uncertain outlook for most software vendors. We are also lowering our rating on Internet Security Systems from a 1-Strong Buy to 2-Buy to adjust for these uncertainties and lack of visibility. While valuations for many of the companies are starting to look interesting, as a whole, we remain somewhat cautious on the security software vendors given the uncertainties introduced into the market over the last two weeks which could lead to more downward revisions in the September and December quarters and spill over in the first quarter of 2002. Internet Secuirty Systems Israel Hernandez Downgrading from Strong Buy to Buy 2 - Buy / $13.00 (USD) q We are downgrading ISSX from a 1- Strong Buy to a 2-Buy rating to reflect the lack of near-term visibility, and changing economic backdrop that increases the likelihood of a potential shortfall to our Q3 forecast. q Given the events of the past two weeks, we believe ISS and other security software vendors may run into difficulty closing business in a back-end loaded September quarter. q We are lowering our price target from $35 to $20, or 4 x FY01 revenues of $223M, to reflect the increased economic uncertainty in the current environment. VeriSign Inc Israel Hernandez Upgrading to Strong Buy from Buy 1 - Strong Buy / $38.30 (USD) q Given VeriSign's strong revenue visibility in a period of global economic uncertainty, we are raising our rating from 2-Buy to 1-Strong Buy making it our top pick in the sector. q In light of the global slowdown, we believe VeriSign provides investors with exceptional earnings visibility given its services model and strong deferred revenue balance. This visibility should enable VeriSign to sustain a premium valuation and outperform most technology stocks, even in a contracting environment. q We believe new value added services laid on top of a relatively fixed cost structure will provide significant margin expansion, currently at 14.6% and growing to the low thirties in the next 2 years. Oil & Gas: Exploration & Production Thomas R. Driscoll Some E&P Shares Now Appear Attractive q We are lowering our natural gas price forecasts as well as revising target prices and codes for the large-cap oil exploration and production companies we cover. We now believe that several companies we cover offer compelling values today. As a result we are upgrading our ratings on the shares of EOG Resources (EOG), Noble Affiliates (NBL) and Pioneer Natural Resources (PXD) from 2-Buy to 1-Strong Buy. We are also downgrading our code on the shares of Devon Energy (DVN) from 2-Buy to 3-Outperfrom to reflect heightened concerns about the increased debt load that will result from recently announced acquisitions. We are also downgrading our codes on Vintage Petroleum (VPI) from 1-Strong Buy to 2-Buy. AOL Time Warner Holly Becker Fund. Remain Strong In Unstable Environm 2 - Buy / $29.25 (USD) q The economic and advertising slowdown has obviously been compounded by recent tragic events. AOL Time Warner remains the premier integrated media company with a uniquely valuable portfolio of assets. While near-term estimates may need to come down further, we view the stock's pullback as a compelling buying opportunity. q AOL Time Warner's core businesses offer investors superior earnings power and growth, while new cross-platform initiatives should propel the company's long-term growth rate to above industry norms. q Advertising represents only 25% of revenue, considerably lower than comparable companies including Viacom (45%) and Disney (30%). Gaming & Lodging Joyce Minor Rich Bottom Fishing, But Dangerous Water q The gaming and lodging sectors saw huge downside moves last week, with the large cap gaming stocks down an average of -33% and the lodging stocks down an average of -34%. The hotel REITs were down too, by -39% on average. We continue to believe that calling the course of the conflict determines your appetite for the sector. Investors that believe in a short period of pain followed by a gradual rebound would buy the stocks now, especially gaming companies like HET, STN, PENN, but even the other large cap gaming and lodging names would appear near historical bottoms and attractive for the long haul. Among the hotel REITs, the unwinding of the FCH/MHX merger seems to have overly punished both, but especially MHX. We think MHX is an absolute 1- Strong Buy at these levels. More broadly, investors like us that are concerned by the potential course and duration of the conflict and the risk of events that will merit continuing travel fears may opt to stay on the sidelines with respect to the gaming and lodging stocks. q Lodging stocks are trading at discounts to replacement of 15% to 45% (vs. typical 30% bottom) and gaming at discounts of 20% or so. Lodging REIT yields are 9% to 14%, even if dividends are reduced by 40%. Wireless & Internet Infrastructure Timothy Luke Investigating Chinese Telecom Markets q Following checks with numerous industry sources in China, we have attempted to clarify some concerns over China Telecom's capex & a possible slowdown in metro markets in China. q Believe CT may have reduced its planned '01 capex in recent months by about 25% from $12b to $9b and slowed down discretionary spending. Reductions appear to be a result from the uncertainty pending CT's major reorganization. q In the n-term, we believe that vendors like Cisco and Nortel may see their sales into CT somewhat below normalized levels. However, this situation should be temporary and we may see an uptick in spending by CT once reorg is completed. Nevertheless, we believe '02 capex is likely to be below '01. q Separately, the Chinese Ministry of Information Industry recently issued a Notice to regulate broadband access networks. We believe some metro vendors may be impacted by this ruling since Layer 3 switches are also sometimes deployed to provide last-mile access. FOCUS STOCK Bed Bath & Beyond Alan Rifkin Second Quarter Earnings Preview 2 - Buy / $20.61 (USD) q BBBY will report 2Q EPS after the market close on September 25. While no retailer is immune to an economic slowdown, we remain confident BBBY will achieve our 2Q EPS est of $0.18 vs $0.15 last year. q We estimate total sales rose 24% to $730.8MM, driven by a 3% comp. q We forecast a 9 bp decrease in gross margin, which combined with an 11 bp improvement in SG&A, results in a modest increase in 2Q operating margin. q BBBY remains one of our top picks---the only retailer within our universe of coverage to meet or exceed its original guidance since mid-2000. Well-insulated with $276MM in cash and $0 debt. q Valuation. Currently trading at a 39% premium to S&P 500, though historically has traded b/w a 20% discount and 115% premium. Liberty Media Group Stuart Linde Sensitivity Analysis: Limited Downside 1 - Strong Buy / $11.93 (USD) q Our worst case scenario yields a NAV of $13.32 per share. We believe that current trading levels represent a compelling buying opportunity as downside risk is limited by (1) lowest exposure to advertising market in our universe, (2) risk management strategy and (3) strong balance sheet. q At the close of 09/21, 10 days following the tragic terrorist attacks, LMCA has declined by 16%, in line with the S&P Entertainment Index versus a 14% decline for the market. COMPANY / INDUSTRY UPDATE Health Care Distribution & Technology Lawrence Marsh Lehman Weekly Persp. - "THE WORST DAY" q Lehman Brothers Health Care Distribution & Technology Weekly Comments and Perspectives q We are providing a review of last week in our Health Care Distribution & Technology universe - "THE WORST DAY", commenting on the horror seen in the city on September 11. q Our covered group was down 7.8% since September 7th vs. the S&P 500 down 11.3%, the Russell 2000 down 15.5%, and the NASDAQ Composite down 16.1% over the same period. Henry Schein, up 3.4%, was the strongest performer for that period; OMI, down 15.4%, was the weakest performer. q We are providing a brief review of implications from the past two weeks in our group, and also pointing to points from our 2001 Fall Outlook Update. We also point to our reiteration of our initiations on ACDO and GTIV, and our upgrade on PSSI. q We are providing a 10-K review of DKWD, highlighting a SCOR update, and noting recent news items, from CAH, GTIV, SCOR, PSSI, OMI. Portfolio Strategy Charles Reinhard Cutting Exp. EPS, Eqty Returns, & Valuat q The policy response to the savage attack on civilization continues to be vigorous. A sustained diplomatic and military campaign against terrorism is coming into place. Monetary policy has been aggressive, with more to come. And fiscal policy is swinging into gear. Still, the United States is likely to remain in recession for the remainder of 2001. We are thus cutting our 2001-2002 S&P 500 EPS forecast from $49.25 to $46.50 this year, and from $59.00 to $53.00 next year. In a riskier world, we are also assuming lower valuation for the stock market. Accordingly, we are cutting our forward one-year S&P 500 price target from 1375 to 1200; the Dow Jones Industrials equivalent is 10,000. q Our Economics team is now looking for a shallow U.S. recession for the second half of this year, with GDP down roughly 1.5% in the third and fourth quarters. The jobless rate will rise to 5.3%, we think, as CPI drops to 1.9%. With the Fed Funds rate at 3%, expect the Federal Reserve to cut rates to 2.5% at the next FOMC on October 2. With core CPI at 2.7%, that would take the real Fed Funds rate below zero. Historically, the real Fed Funds rate has always gone to at least zero during profit recessions of the current magnitude. Whether the Fed will need to do more after October 2 remains to be seen. That the central bank will do whatever it needs to do is beyond question. With another drop in short-term interest rates, the yield curve should steepen further. NOTES FROM TODAY Specialty Chemicals Timothy Gerdeman Cautiously Accumulate Select Chem Stks q While it remains premature to fully assess the ultimate impact to U.S. specialty chemical companies resulting from last week's terrorist attacks, certain stock valuations may already discount the likely adverse business impact. The table provided below lists respective share price declines occurring since the stock market reopened on September 17. For conservatism, we now assume zero global GDP growth and flat (versus prior expectation of lower) 2002 raw material costs, which could place an approximately 10% downward bias to our average 2002 EPS expectations. Handicapping our preferred share-price entry points for risks currently present, right now we would accumulate CYT particularly below $25/ share, CBM particularly below $38/ share, EC particularly below $23/ share, and APD below $38/ share. Carnival Corp Felicia Rae Kantor Searching for a Bottom 3 - Market Perform / $17.13 (USD) q We are maintaining our Market Perform rating on CCL. While the company had impressive momentum going into 4Q01 and 2002, the macro-environment has changed. As such, the risk/reward still points to the downside, in our opinion. q That said, this note provides investors with several tools that should provide assistance with finding an attractive entry point for CCL. q We have also taken a first stab at our earnings estimates by lowering 4Q01E and 2002E EPS to $0.20 and $1.50 from $0.30 and $1.85, respectively. q Both our scenario revenue analysis and our total return analysis illustrates that the stock could bottom at $14-$15. However, a protracted and deep recession could render this analysis invalid. Darden Restaurants Mitchell Speiser Conf Call Hi-Lights; Sept Solid 1 - Strong Buy / $24.79 (USD) q Comps steadily improved following last Tues & are now running Positive. Fears of vulnerability seem overestimated, even in a weaker economy. q Mgmt maintains FY02 Comps target at lower-end of 3-5% range & 15-20% EPS growth; forecast takes into account the ill-effects of rising unemployment. q Sales trends resumed to normal levels over the weekend & are running positive, much better than expectations. Through last Sunday, Olive Garden Comps +3-4%, Red Lobster +2-3%. q An aging consumer, lower seafood costs, less dilution from new concepts & Repo will occur despite weaker economy so our FY02E EPS remains <15%. Department Stores/Broadlines Jeffrey Feiner Retail Company Share Repurchase Programs q Below we have listed the buyback authorizations as well as the share repurchase activities for the major retailers. q We believe certain of the major retailers including Wal-Mart and May Department Stores have been aggressively buying shares this past week with the drop in the equities markets. As many of the major retailers in our universe have significant cash balances and ample availability left under current share authorizations, we would expect many retailers to continue to repurchase company shares at these depressed levels which could cushion some downside from poor September sales results. Note that shares left under authorization may differ from levels reported below due to the market activities of companies since the end of their respective 2Q01 reporting periods. Department Stores/Broadlines Jeffrey Feiner Retail Industry Update Conference Call q We cordially invite you to participate in our conference call to update investors on Department Store/Broadline Retailers on Monday, September 24, 2001, at 2:30 p.m. (EST). q With the continued uncertainty around consumer confidence and retail spending, we believe that several retailers offer a reasonable amount of downside protection given their defensive positioning relative to product mix. We will be providing investors with an update on several select stocks including Wal-Mart, Costco, Kmart, BJ's, and Family Dollar as well as providing investors with an update on the overall department store/Broadline and Specialty Stores apparel retail industry. Oil Tankers Daniel L. Barcelo Weaker Demand Outweighs any War Bounce q Tragedy buttressing rates near-term; Negative implications next year q Due to the terrorist attacks, economic activity and air travel are expected to be lower, resulting in lower demand for oil products this year and next. However, it is not likely that supply will be immediately interrupted, as major oil producing nations are not yet direct targets for retaliation. As charterhire rates track oil production we expect sustained upward movement in rates near-term. If a supply interruption does occur it will be negative for charterhire rates. Lower economic growth next year could imply less supply from OPEC. Valuations remain extremely depressed with shares trading at a discount to NAV and 3.5x EV/DACF with a 2002 group average ROCE of over 15%, however, the low liquidity of the group is a negative in this market. Duke Energy Daniel Ford Duke Energy Acquires Westcoast Energy 2 - Buy / $37.17 (USD) q ? In our opinion, the acquisition of Westcoast Energy is long-term positive for Duke. We estimate that the transaction will be $0.04 accretive to 2002 earnings and provide additional growth opportunities in North America. Near-term arbitrage pressure and regulatory review will likely hold back DUK shares. q After last Thursday night's close, Duke Energy announced the acquisition of Westcoast Energy in a stock and cash deal valued at $8.5 billion. q Under the terms of the agreement, Westcoast shareholders will receive C$43.80 per share in cash, shares of Duke Energy or a combination of both such that the overall consideration will be 50% cash and 50% stock. PG&E Corp Daniel Ford PCG Reorganization Plan Emerges 2 - Buy / $15.72 (USD) q PCG's utility filed a bankruptcy reorganization plan in SF yesterday, indicating substantial EPS upside potential in 2003. We reiterate our 2-Buy rating. Lehman Brothers acted as financial advisor to PG&E Corp., which is a co-proponent of the reorg plan. q PCG's utility subsidiary filed its plan of reorganization with the bankruptcy court yesterday. Preliminary analysis of the unique plan, which would not require CPUC approval, indicates potential upside to $3.00- 3.10 of consolidated earnings in 2003 and $3.50+ in 2004. q ? Legal challenges to specific portions of the reorganization plan could limit the earnings upside potential and delay the timing of emergence from bankruptcy. Associated Banc-Corp Jason Goldberg 3Q01 Preview 3 - Market Perform / $30.46 (USD) q We believe ASBC's current valuation reflects recent improvements, the expected margin expansion from its liability sensitive balance sheet and pristine credit quality. We rate ASBC 3-Market Perform. q We expect ASBC to report 3Q01 EPS of at least $0.66 on October 18. Continued strength in the net interest margin could provide upside to our estimate. q 3Q01 should witness continued expansion in net interest margin and moderating commercial loan growth. Mortgage banking and service fees should continue to lead increases in fee income. q Asset quality metrics should continue to be better than its peers. q Our 2001 and 2002 EPS estimates (old GAAP) are $2.65 and $2.85, respectively. On a new GAAP basis our 2002 estimate is closer to $2.95. BB&T Corp Jason Goldberg 3Q01 Preview: The Last Restatement 2 - Buy / $34.05 (USD) q We rate BBT 2-Buy with a $40 price target. BBT is currently trading at a multiple discount to the group, compared to its typical modest premium. q We expect BBT to report 3Q01 EPS of $0.62 ($0.66 cash) on October 11. We believe 3Q01 results will evidence a much better behaved NIM, decent (but slowing) loan growth, strong fee income expansion led by mortgage banking and controlled expenses. q Asset quality ratios are expected to continue to show signs of deterioration. q While 3Q01 will mark the eighth time in the last nine quarters and the thirteenth time in the last nineteen quarters the company has restated results, it is expected to be the last! First Midwest Bancorp Jason Goldberg 3Q01 Preview: Margin Expansion Continues 3 - Market Perform / $30.83 (USD) q In our view, FMBI's strong franchise, being nicely positioned in Chicago Land, consistent earnings growth and sound asset quality are the reasons the company trades at a premium to our Mid-Cap Bank index. We rate FMBI 3-Market Perform. q FMBI raised 3Q01 guidance today to $0.53, above its previous expectations of $0.51 to $0.52. Better than expected results should be driven by 20 to 25 bp expansion in the net interest margin. Mgmt also expressed comfort with 4Q01 consensus of $0.53. We remain a penny ahead at $0.54. q In addition to margin expansion, results should evidence moderate loan growth and continued fee income expansion. Johnson & Johnson David A. Gruber Coated stent leadership still evident 2 - Buy / $52.07 (USD) q The Cook ASPECT data do not alter our hypothesis that J&J is well positioned to obtain a sustainable stent market share in the U.S. < 50%. The RAVEL data establish a high standard. J&J is believed to have at least a 9-12 month lead in the all-important U.S. stent market. JNJ's valuation relative to the market reflects its profile as a "safe haven" in these uncertain times. q Cook ASPECT trial results not directly comparable to J&J RAVEL data. Cook lesions not as complex. Late loss evident. RAVEL restenosis rate of 0% a difficult standard for comparison. q 2003 EPS estimates ($2.53) unchanged despite Cook results. J&J remains highly defensive with improving growth prospects. Medtronic Inc David A. Gruber Reiterating 1-Strong Buy Recommendation 1 - Strong Buy / $39.80 (USD) q ? We are reiterating our 1-Strong Buy on Medtronic. Tuesday's analyst meeting is likely to serve as a catalyst for appreciation; at worst, increase investor confidence in target attainment. Since September 11, despite being in the defensive healthcare sector, MDT has declined 10%, in-line with the S&P500. Positive news flow in CHF, BMP and elsewhere is expected by year-end. q Early FDA approval of InSync for CHF likely to accelerate market development by 6-12 months q Vascular risk remains manageable. FY02 EPS guidance likely to be unchanged. Offsetting opportunities (led by CHF) readily identifiable. q Analyst mtg. on Tue. to highlight 10-year CAGR of 38% and tech. platform opportunities for sustainable growth. Major Pharmaceuticals Charles Butler Peek at the Week ~ Week Ending September q Lehman Equity Research reviews issues affecting pharmaceuticals for the Week ending September 21st, 2001, and previews the forthcoming week. q Bristol-Myers Squibb and Imclone Systems announced they would engage in a JV for the cancer fighting compound, C225. Additionally, Bristol-Myers Squibb will purchase a 19.9% interest in Imclone with total transactions costs at $2.0 billion. q Eli Lilly sold worldwide rights to oritavancin, a late-stage Phase III compound for complicated skin infections and bacteremia. The strategic move by Lilly will allow them to allocate their internal resources to other late-stage pipeline opportunities. q The FDA panel for Eli Lilly's Xigris, originally scheduled to meet September 12th, did not convene due to the tragedies in New York and Washington. After reviewing the Lilly presentation & FDA's interpretation (available on the FDA website) and speaking with two members of the Xigris team, we increased our peak sales estimates to $2.6 bil from $2.0 bil. q We increased estimates for Merck KgaA from Eur 4 to Eur 4.5 and increased long-term growth rate from 11% to 13% in light of the new deal between Bristol-Myers Squibb and Imclone's Systems for C225. Boeing Co Joseph F. Campbell Thinking Through Uncertainty 2 - Buy / $30.10 (USD) q Boeing's $29 billion total enterprise value is too cheap given the company's $51 billion 2002 revenue, but BA is always undervalued during downturns. The current $30 price is about the resting point until there is more info and progress towards normalcy. q The 1st step of helping airlines weather the financial storm created by the attacks has already been taken by the government. q The 2nd step of reacting is underway with the airlines and Boeing cutting schedules and production about 20%. These dramatic rearrangements are expensive one-time financial events. General Electric Robert Cornell Our Takeaways From GE's Analysts Meeting 1 - Strong Buy / $31.30 (USD) q GE endorsed 2001 EPS guidance of $1.41, which is better that many anticipated. The bottom line is that GE continues to deliver a double-digit growth even in the face of significant economic downturn. Investors should expect a continuation of double-digit growth into 2002. We are estimating 2002 EPS at $1.60. q Surprisingly, the short-cycle order rates have quickly bounced back to pre-crisis levels, which coupled with stringent cost control mechanisms, provides short-cycle businesses with a cushion against worsening market conditions. q The outlook for long-cycle businesses remains very positive. The impact of reduced air travel on Aircraft Engines business appears to be moderate. Broadcasting/Radio & TV William Meyers Radio Stocks Remain Fully-Valued q Prospects for an advertising growth recovery were in doubt prior to Sept 11 and the repercussions (economic/social) from the incidents exacerbate an advertising environment that was already the weakest in the last 40 years. We now expect 2001 radio advertising to fall 8% vs. our previous projection for a 3% decline. Concurrent with revised advertising growth forecasts, radio equities have fallen 16% (since September 10), larger than the 12% decline in the S&P500 and in-line with the NASDAQ. Despite this correction, radio equities remain fully-valued trading at ~15x 2002E EBITDA, only a slight discount to the 15.6x prior to the tragedies. q While we believe the industry impact is cyclical rather than structural, over the near-term we remain most cautious of Cox Radio given its high valuation, Radio One based on its leverage and Emmis given a combination of its television exposure and high leverage. q Conversely, we believe Clear Channel is the most defensive given its relatively low multiple, debt leverage and limited downside. In addition, we view Spanish Broadcasting as a special situation (small cap) based on its likelihood to still meet FY 4Q (Sept) estimates, continued ratings and operating traction in its key markets and underlying asset value. q While radio operators have yet to quantify the near-term financial impact, we expect a preliminary look Wednesday when Emmis reports FY2Q (August) results. 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 outperformthe 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)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 ------------------------------------------------------------------------------ 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.
|