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Enron Mail |
Good Wednesday Morning - Comments From The Local Guys! The market is, at this stage, only focusing on the negatives in the marketplace. The perception that this war on terrorism will be long and protracted - with the potential short-term impact to the economy being deeper than prior to September 11th. However, the pace of economic spending by the administration may hasten the end of the economic downturn. Hang in there. IMPACT CALLS M&T Bank Brock Vandervliet Upgrade to 2-Buy, Compelling Valuation 2 - Buy / $67.16 (USD) We are upgrading MTB from 3 Market Perform to 2 Buy, based on valuation and solid fundamental performance. Our estimates and target price are unchanged. Going forward, we expect MTB to generate EPS growth of 11%, significantly better than the 8% group overall. Banks - Citibank Henry Chip Dickson Citi Previews Stronger than expected 3Q Citi Previews Stronger than expected 3Q The September 11th Disaster is expected to reduce Citi's 3Q01 results by $0.12-$0.14. Citi had expected to earn $0.77 for 3Q01, $0.02 better than consensus expectations despite a deteriorating economy and a challenging market environment. The sources of 3Q strength appear to be many of the Consumer businesses, Emerging Markets, Fixed Income and productivity gains. Based on the guidance, a weakening economy and global turmoil, we reduced our 2001 EPS estimate $0.18 to $2.87 and we reduced our 2002 EPS estimate $0.05 to $3.45. q Our rating remains 1 - Strong Buy with a $70 price target. Citi trades at, or just below, the median Large Cap Bank p/e based on 2002 estimated EPS despite the strength and diversity of its franchise. Integrated Oil - European Recommendation Downgrades Jeremy Elden Low risk, but low recovery potential Following last week's tragic events, we are leaving most of our price targets unchanged. The larger companies now look cheap in absolute terms. However, we expect equity markets to rally even more strongly, leaving the oil sector behind and perhaps making the current position a long-term relative high point for the sector as seen in 1979/80 and 1990. For now, the sector has the advantage of being lower risk but, once investors feel more comfortable with the economic and political outlook, they may move elsewhere. Oil supply currently unaffected Demand expected to fall Eni and TotalFinaElf have greater exposure to Mid. East/N.Africa Repsol YPF price target cut to E17.5 from E18.4 ENI rating cut from Strong Buy to Buy TotalFinaElf rating cut from Buy to Market Perform Oil & Gas: Exploration & Production Thomas R. Driscoll Outlook-Shares in Light of Development Recent events do not substantially change our view of intermediate-term oil and gas fundamentals. We remain cautious on the E&P sector overall but we are looking for selective purchase opportunities. Near-term prospects are that oil prices may be higher than we previously thought. Weakening economic activity may hurt natural gas demand and lead to a more prolonged natural gas oversupply situation - and weaker natural gas prices. E&P shares fell 1-6% on Monday and we are looking for entry points. Both EOG Resources and Noble Affiliates appear to be more than 10% below our estimate of fair value. COMPANY / INDUSTRY UPDATE Beverages Michael Branca Consistency & Predictability Uncertaiin From an earnings stability perspective, the beverage industry will plainly be hurt by recent events and increasing recessionary pressure in the near-term. But, historically, the industry has still generated relatively consistent profit and cash flow growth -- even during recession and slow-growth economic environments. Nearly all consumer products, including commercial beverages, are impacted during such trying times. However, the beverage industry tends to suffer less significant short-term consumption disruptions and a far more rapid return to normalcy. Moreover, the 3 big beverage companies tend to suffer less as their product portfolios are skewed to more affordable, traditional products which could benefit from trade down consumer behavior. Fortunately, these companies are blessed with the virtue of consistently generating tremendous amounts of free cash flow -- such operating performance affords far greater opportunities for share repurchase and equity stock price support/resilience, especially in volatile markets. Cosmetics; Household & Personal Care Ann Gillin Lefever Seeking Earnings Stability From an earnings stability perspective, the household and personal care industry will plainly be hurt by recent events and the increasing recessionary pressure in the near term. However, the industry is likely to outperform the market from an earnings growth perspective, which has historically led to multiple expansion above current levels. q Among the large caps companies in our coverage, we currently prefer Colgate for its earnings consistency, driven by the strongest unit growth in the group. P&G is our next choice, due both to its recent efforts to reign in costs (and consequently improve its earnings consistency) and its valuation relative to the other large caps. Likewise, Clorox is currently in the cost-cutting mode. Gillette is our least favorite as we believe that it is most exposed to discretionary consumer spending and has already fully priced in the expected upside from its very focused management team. q Notwithstanding that the large caps are most likely to benefit from an investor flight to liquidity, we are not inclined to chase the small caps. As we have noted in the last month, we believe that Dial almost fully discounts a takeout price, which we peg at roughly $16. Energizer and Rayovac appear exposed to consumer discretionary spending, particularly as we enter the all-important CY Q4. Underlying fundamentals at Playtex are still not strong enough to drive relative earnings out performance, a key driver of multiple expansion. Food Andrew Lazar Stocks Offer Earnings Stability q From an earnings stability perspective, the packaged food industry will plainly be hurt by recent events and increasing recessionary pressure in the near term. But historically, the industry has generated relatively stable profit growth - even during recession. q In short, the packaged food sector is generally less economically sensitive than other sectors and, unlike many other sectors, has not had pricing leverage for years. q While food stocks are not inexpensive - trading at the upper end of their historic trading range - the group has traded at as much as a 35% relative premium during periods of slower economic growth, suggesting potential further relative outperformance. NOTES FROM TODAY Oil & Gas: Exploration & Production Thomas R. Driscoll Storage Report - Wedn. at 2PM Storage report -- to be announced this Wednesday at 2PM. We estimate that this week's storage report - to be announced this Wednesday at 2PM - will be an injection of about 85 bcf (10 bcf lower than our previous estimate of 95 bcf) compared to an injection of 72 bcf a year ago. Air Conditioning Customer weighted cooling degree days for last week were 42 (10 higher than our previous estimate of 32) compared to 62 last year and 48 normally. We estimate that next week's storage report will show an injection of about 85 bcf compared to an injection of 67 bcf a year ago. NOAA estimates cooling degree days of 31 versus 40 last year and 39 normally and heating degree days of 19 versus 27 last year and 27 normally. We expect the year-over-year storage surplus to increase from 409 bcf as of 9/7/01 to 422 bcf (estimated injection of 85 bcf versus 72 bcf a year ago) for the week ended 9/14/01. Oil Services & Drilling - Rowan James Crandell Reducing Third Quarter Estimate Rowan Companies continues to experience weak Gulf of Mexico conditions, specifically for its premium Gorilla jackups. We believe that Rowan will experience weak activity levels through 2001 with a gradual resumption of higher drilling levels in 2002. We rate the shares a 1 Strong Buy. We are reducing our third quarter estimate to $0.22 from $0.25 in reflection of continued weakness within the Gulf of Mexico jackup market. New company guidance is $0.20-0.25. q For the first two months of the quarter seven to nine rigs have experienced downtime. Utilization for the company four Gorilla rigs has run at 31% for the first two months of the quarter. Other remaining jackups in the GOM have run at 82%, but we expect this will fall to 60-65% in September. q Dayrates continue to be weak, falling to an average of $57,000 from $61,000 and we believe will fall farther. Oil Services & Drilling - ENSCO Angeline Sedita GOM Weak - Reducing Third Qtr. Estimate ENSCO is a leading offshore driller with a strong presence within the Gulf of Mexico, as well as in the international markets. Continued weakness within the GOM has resulted in a further reduction in our estimates, however international markets continue to be strong. As the stock is trading at the lowest multiple in the group and we view 2002 as a stronger year, we rate the shares a 1 Strong Buy. We are reducing our third quarter estimate to $0.40 from $0.43 and reducing our fourth quarter estimate to $0.25 from $0.36 in reflection of falling day rates and utilization within the Gulf of Mexico. We are also reducing our 2002 estimate to $1.35 from $1.99. New contract roll-overs for the 250ft IC and 300ft IC jackups have fallen to the mid-to-upper $20,000's from the low-to-mid $30,000's only a month ago. We expect rates to decline even further. ENSCO currently has six jackups idle, but expects one to two rigs to go back on contract over the next week or two. Orion Daniel Ford Focus on the Numbers 3 - Market Perform / (USD) ORN is the biggest power producer in New York City and the stock has declined 22% since trading reopened this week. Below, we provide a factual summary of market pricing and conditions. ORN is the biggest producer in New York City with 2,160 MW. Press reports set last week's events as removing 100-200 MW of load from nearly a 9,000 MW market. NYC economics for ORN are driven largely by capacity revenue (MW available) and energy pricing margin. The next bi-annual capacity auction is in October and is based on trailing demand conditions Our capacity assumption drops from $105/kw year in 2001 vs. $85 per kw year in 2002 and has been conservative though is volatile (every $10/kw year is $0.13/share). Restaurants Mitchell Speiser FY1Q Preview/Bias Toward Upside Expect at least in-line FY1Q EPS & above-category Comps. While Sep sales likely to be weak on fragile consumer spending, mgn grth should continue on lower seafood costs & advertising rates. Maintain 1-Strong Buy. Expect FY1Q EPS of $0.49-$0.50, +7-9%. Bias toward Upside on steady Comps & mgn growth. Expect update on Sep. sales; given fragile consumer spending, softness likely. With June/July known, expect FY1Q Comps of 2.5-3% at Red Lobster & Olive Garden led by Pricing. 1Q/Full year Comps target; low-end of 3-5% range. With seafood & advertising costs down 20% & 10%+, resp., this is a source of potential upside. Expect solid FY1Q/DRI's value positioning & nat'l awareness should drive above category grth. At <14x, Maintain 1-rating. Mortgage Finance Makiko Coakley FNM & FRE: Strong Fundamentals We believe FNM and FRE are very well positioned in this uncertain market environment. When there are market disruptions, the GSEs step up to provide liquidity in the mortgage market. The expected increase in the refinance mortgage volume (due to lower interest rates) should result in higher mortgage purchase volume. At the same time, the lower interest rates should result in higher net interest margins. Further, their credit statistics continue to remain solid. FNM and FRE are still trading at less than 14 times our '02 EPS estimates, which is below their median P/E multiples over the last 5 years. We reiterate our 1 Strong Buy ratings for both stocks. Our price targets are $100 for FNM and $80 for FRE. FNM reported its August business volume on Tuesday. While its mortgage purchase volume came in in-line, its net interest margin was much higher than we expected (expanded by 5 bps, while we were expecting a decline). Despite the margin expansion, the company kept its guidance for its EPS in 2001 unchanged due to the fact that it is repurchasing its own debt. Debt repurchases should enhance its earnings growth in 2002 and beyond. Major Pharmaceuticals Charles Butler Rx Monthly Trends: August 2001 IMS monthly script data for August 2001 is now available. Comparing new prescription data to that of August 2000: ACE/A2 drugs were down 0.4%, allergy drugs up 3.4%, alpha blockers were down 4.1%, antibiotics were up 1.0%, antifungals were up 3.8%, arthritis drugs were down 3.9%, asthma drugs were up 7.6%, calcium blockers were down 8.8%, cholesterol lowering drugs were up 29.5%, oral diabetes drugs were up 5.0%, migraine drugs were up 1.5%, osteoporosis drugs were up 1.5%, rheumatoid arthritis drugs were down 2.6%, schizophrenia drugs were up 6.8%, seizure drugs were up 5.6%, sexual dysfunction drugs were up 6.8%, and ulcer drugs were up 3.2%. Below we have presented a sample of script data trends on timely therapeutic categories. Our detailed monthly script report outlining all major therapeutic categories will soon be available. Medical Supplies & Devices - Eye David A. Gruber Pre Announces Q3 Results We maintain our 3-Market Perform rating on EYE given the limited visibility on 2002 EPS and no clear indication that the erosion in revenue has subsided. Company pre-announces Q301 results. Reducing 2001 and 2002 EPS estimates Fair value for the stock is difficult to determine. Food - General Mills Andrew Lazar Strong Start To FY02. Maintain Buy General Mills reported above-forecast fiscal 1Q02 operating EPS of $0.60 (excluding $0.02 of goodwill addback) - in line with our estimate and a penny better than Consensus. We continue to forecast double-digit EPS growth in fiscal 2002 for GIS core business, supported by peer leading volume gains. Fiscal 1Q volume improved 5%driven by yogurt and snacks. Cereal shipments declined slightly resulting from strong sell-in of new products in previous quarter, however, takeaway rose a robust 5%. q Given recent events, our contact phone number will be 917-689-2587. We look very forward to reconnecting with all of you. Electronics Manufacturing Services - Solectron Louis Miscioscia Meets Expectations, Challenging FY Ahead Solectron reported in-line 4Q01 results and maintained forward guidance. However, we are reducing our estimates given the lack of visibility and in order to take a more cautious approach. For the 4Q revs came in at $3.6B, $200M above our est, and EPS hit concensus at $0.06. For the full year revenues were $18.7B and cash EPS of $0.78. We are moving FY02 revs to $13.4B, down from $14.9B and well below guidance of $16.5B-$18B. Our new EPS est is $0.30 from our prior $0.57. Our reason for being below the revenue and EPS guidance of $0.60-$0.65 is due to the concern that the end markets will take longer to bounce back, especially those in the comm areas, and we want to remain conservative on sequential growth. Business & Professional Services Jeffrey Kessler Cendant to Offset Airline Traffic Drop The market's immediate response has hit Cendant's stock by xx%, due mainly to its increasing exposure to the travel sector. While we may have to lower our estimates a few cents, there are several factors which should offset any serious downward earnings estimate changes. Negatives: An expected drop in airline travel should hurt earnings at pending acquisitions Galileo and CheapTickets, at same-store revenues in Cendant's airport-related hotels, and eventually at Avis, when the current auto-rental surge ends. Positives: Over the very short term, Avis is sold out, giving it more time to continue de-fleeting. Over 5000 of Cendant's 6000 franchised lodging units are roadside based, and are also getting a short-term pop from non-airline travel. Longer term, the 20%-30% surge we are seeing in new franchise sales in both lodging and real estate, as well as NRT's aggressive acquisition activity should offset the same-store declines. Paychex Inc. Adam Waldo Expect Another on Target Quarter. 2 - Buy / $31.69 (USD) On September 20,we expect PAYX to report F1Q02 results (for the quarter ended August 2001). We look for revenue of $244.3 million (up 20% year over year) and EPS of $0.19 (up 24% year over year). Management will host a conference call to discuss the results at 11AM EST at (877) 668-3803, no passcode. A replay will be available at (706) 645-9291, passcode is 1572439. With a high return, low execution risk organic growth "rollout" strategy, a 64%(and rising)return on average invested capital, historically low revenue and earnings volatility,a vast addressable market opportunity which grow 11-13% per annum and is about 15% penetrated,and a strong market position,we believe PAYX is one of the highest quality stocks in our Business & Professional Services universe Department Stores/Broadlines Jeffrey Feiner Week 2 Retail Sales (Part 1) q Below are the estimated sales for September, week 2 for major retailers. q Sales for week 2 - which were obviously an anomaly given the events of September 11 - were below to significantly below plan for most of the retailers in our universe. The exceptions were value-oriented retailers. Wal-Mart, for example, experienced more-favorable results from increased sales in food as consumers stocked up on pantry items in reaction to the recent events. Dollar General's comparable store sales for the second week were slightly above plan while Costco reported sales for the week just slightly below plan. Department Stores/Broadlines Jeffrey Feiner Week 2 Retail Sales (Part 2) q Below are the estimated sales for September, week 2 for major retailers. q Sales for the second week of September were below to well below plan with the exception of the discount sector, which experienced strong sales of consumables and other items associated with 'pantry loading.' After falling as much as 20% at department stores, retailers in our universe reported that sales began to return to more normalized levels over the weekend, although sales at mall-based retailers and those with a large presence in the Northeast remained sluggish. Below we provide sales commentary for several companies in our universe. Business & Professional Services - CTAS Adam Waldo Quarter of Decelerating Top Line Growth On September 19, we expect CTAS to report F1Q02 results (for the quarter ended August 2001). We look for revenue of $576.8 million (up 10.5% year over year) and EPS of $0.34 (up 13% year over year). Management will host a conference call to discuss the results at 11AM EST at 800-946-0782, passcode: 520860. In F1Q02, we look for consolidated revenue growth of 10.5% (8% internally), marking the third straight quarter of decelerating top line gains in the slowing U.S. economy. CTAS' two principal drivers of the velocity of top line growth are the pace of GDP and employment growth. Trading at 28 times our fiscal 2002 EPS of $1.49, 36 times our fiscal 2002 free cash flow forecast, and a trailing EV/EBITDA ratio of 15 times (private market value range of 7-11), we think CTAS is fully valued despite a "defensive" 60% recurring revenue model. With management following strategies for longer-term shareholder value creation (nicely improving internal unit growth, unit pricing, and capital efficiency), we would be buyers in the low $30s. Wireless Services John Bensche DCEL to Sell 5 Properties to Verizon The sale of 5 non-strategic to Verizon will de-lever the balance sheet, putting DCEL on stronger footing. We reiterate our 1 Strong Buy rating. DCEL is in negotiations to sell 5 properties (AZ, CA, GA, OH, TN) to Verizon for $550M or $480 per POP. The proceeds will be used to pay down debt. The company indicates that the properties under negotiation were a good fit for VZ, and are not strategic to AWE or Cingular. In addition, these markets are island markets that were non-contiguous to other DCEL properties. The TN property is owned jointly with AWE through the American Cellular JV, the purchase price for this property is expected to be $202M or $697 per POP. Proceeds to DCEL will be $101M. We estimate that $337M will go to Dobson to pay down debt. The per POP price for the 4 Dobson properties (AZ, CA, GA, OH) is $406. Wireless Services John Bensche Postponing Management Lunch on 9/19 Postponing Management Lunch on 9/19/01. Due to the unfortunate circumstances in New York City last week, we are postponing the American Tower management lunch that was previously scheduled for this Wednesday, 9/19. We intend to reschedule this event as soon as possible. Wireless Services Timothy Luke Conference Call: 9/20 - Investigating Global Wireless Outlook We are pleased to announce our Wireless Services and Wireless & Internet Infrastructure analysts, John Bensche and Tim Luke, are hosting the Lehman Brothers Global Telecom Conference Call on Thursday, September 20, 2001, at 10:30 a.m. Following a series of checks, we are reviewing the outlook for global wireless capital expenditures, subscriber growth, and handset volumes in 2002. Upon extensive carrier by carrier checks, we believe infrastructure investments by global wireless carriers are likely to be flat to down in 2002, reflecting more modest spending growth in Europe and lower capex growth in Asia, the U.S., and Latin America. As a result of this revised outlook, we recently trimmed our estimates for leading wireless equipment vendors ERICY ($3.50) & NOK ($15.22), following recent revisions to MOT ($15.45). We believe the stocks already reflect much of the challenging outlook but with few near term catalysts, we remain cautious on the equipment group. The CDMA market continues to outpace growth of industry. We are maintaining our 3 Market Perform ratings on Motorola and Ericsson and our 2 Buy rating on Nokia. Our preferred defensive names remain CDMA innovator QCOM ($46.37) and applications play Comverse ($22.67), both rated 1 Strong Buy. David C. Morris Sr. VP Lehman Brothers 713-652-7112/800-227-4537 dcmorris@lehman.com 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). Do not distribute to retail clients before checking state blue sky restrictions. 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