<<MF August 27th 2001.pdf<<
Good Monday Morning - Comments From The Local Guys!
Today, we thought that we would repeat some of the comments made by Jeff
Applegate, Lehman Brothers' US Investment Strategist this morning. In
reiterates that "a turning point in the earnings cycle is at hand" and this,
along " with attractive valuation and accommodative policy" should help
propel the market to the 1450 year-end S&P 500 price target. In fact, late
on Thursday, the market received some unaccustomed news - that being that
firm, Cisco Systems, was seeing signs of its business conditions
stabilizing. The U.S. stock market showed us on Friday that a little
evidence of corporate business stability could go a long way towards leading
the market higher. As Jeff says: " Indeed, the broader stock market reaction
confirmed that it is still discounting deep reservations around the
prospects for an earnings recovery in the quarters ahead". Despite the rally
on Friday, Jeff still feels that the market closed 16 percent below Lehman's
fair value on forward P/E ratio model. Just when no-one expects the market
to rally, it most likely will.
The 30 -year bond yield is 5.46%.
The 10-year is trading at 4.92%.
The 5-year is trading at 4.48%.
Spot crude oil is trading at $26.62 p/b.
Natural Gas - Henry Hub - is trading at $2.55 p/mcf.
New Federal Insider-Trading Rule (Rule 10b5-1) has 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
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.
PNC Financial Services Gp(PNC) 2 - Buy H. Dickson, .212.526.5659
PNC: Meetings with Management
OLD NEW STREET P/E
Price: $67.1 EPS 2000 N/A $4.31 N/A N/A
52 Wk Ra: $76 - 55 EPS 2001 $4.25E $4.25E $4.25E 15.8
Mkt Cap: $19.6B EPS 2002 $4.65E $4.65E $4.78E 14.4
FY: 12/31 Price Target $75 $75
Rank 2 2
*We believe PNC is close to, if not at, the end point for downward EPS
revisions in this cycle. We continue to rate PNC 2 - Buy.
*Management appears to continue to focus on eliminating high risk activities
at PNC and steps should be taken to reduce the volatility
of private equity in the second half of 2001. Business conditions appear
stronger in Blackrock and PFPC than PNC Advisors.
*The pace of share repurchase activity should accelerate in 2H01 for the
following reasons: PNC has a substantial amount of excess
capital, it is generating lots of free capital flow, it has 12mm shares
remaining to repurchase under its existing authorization, and
there does not appear to be any large acquisitions requiring capital in the
*We think the success of the Regional Community Bank and its large
contribution to PNC (53% in 2Q01) will eventually force mgmt
to reconsider how aggressively they want to grow the business.
AmeriSource Health(AAS) 1 - Strong Buy L. Marsh, .212.526.5315
SUCCESS! Several implications w/ AAS/BBC combo
OLD NEW STREET P/E
Price: $61 EPS 2000 N/A $1.89 N/A N/A
52 Wk Ra: $63 - 32 EPS 2001 $2.27E $2.27E $2.27E 26.9
Mkt Cap: $3.2B EPS 2002 $2.70E $2.70E $2.71E 22.6
FY: 9/30 Price Target $68 $68
Rank 1 1
*We received good news from the FTC late on Friday - a unanimous decision to
allow the proposed merg. of Amerisource/Bergen to
*We are providing several follow-up observations from this determination,
after our more detailed commentary of speculation and
next-steps on Friday morning.
*We highlight three implications of some note: 1) greater visibility into
our raised targets on AAS (implied into BBC) and perhaps
above; 2) an updraft into now #4 player DKWD, closer to our $54 target, and
3) greater visibility of medical-supply platforms of
expansion into the future.
*If we were to suggest the FTC blocking of industry mergers in 1998 led to
several instances of irrational behavior and challenges
moves of diversification, we would believe that 2001's consolidation keeps
broader-based distractions to a minimum. As such,
despite what has been attractive appreciation in shares so far in 2001 (up
22%), we look for solid near-term envir. to continue.
FirstEnergy Corp(FE) 1 - Strong Buy D. Ford, .212.526.0836
Merger Approval Uncertainty Subsiding
OLD NEW STREET P/E
Price: $30.74 EPS 2000 N/A $2.69 N/A N/A
52 Wk Ra: $33 - 23 EPS 2001 $2.90E $2.90E $2.84E 10.6
Mkt Cap: $0.0MM EPS 2002 $3.20E $3.65E $3.23E 8.4
FY: 12/31 Price Target $37 $40
Rank 1 1
*With a New Jersey merger settlement in hand, approval uncertainty has
mostly cleared. We see upside to $40 for FE which when
combined with a 4.9% yield is 35% total return potential.
*On 8/24 FE, merger partner GPU, and other key parties reached a merger
settlement. We look for NJ approval in September, SEC
approval in October, and deal closing by early November.
*FE will retain merger synergies though agreed to limitations on employee
reductions and will reduce a power cost deferral balance by
*We are raising our 2002E $0.45/share to $3.65 to reflect the absence of
goodwill under new accounting rules. We look for the GPU
deal to be modestly accretive in the first year. FE estimates $1.6B of
synergies over 10 years.
*FE is a great value at only 8.4x our 2002E which is a 20%+ group discount.
Our $40 target is 11x our $3.65 2002E.
Mortgage Finance B. Harting, .212.526.3007
Stocks Trade Down in Mortgage Finance "Perfect Storm"
*Our sector traded down sharply on Friday, as a convergence of several
events created what we consider an irrational sell-off. We do
not believe that now is the time to exit the group, and feel that last
week's weakness has presented investors with a buying
opportunity. We reiterate our 1-Strong Buy ratings on Washington Mutual,
Golden West, Golden State, Greenpoint, Sovereign,
Charter One, and Astoria.
David C. Morris
Sr. VP Lehman Brothers
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
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 = Buy (expected to outperform the market
by 15 or more percentage points); 2=Outperform (expected to outperform
the market by 5-15 percentage points); 3=Neutral (expected to perform in
line with the market, plus or minus 5 percentage points); 4=Underperform
(expected to underperform the market by 5-15 percentage points); 5=Sell
(expected to underperform the market by 15 or more percentage points);
V=Venture (return over multiyear time frame consistent with venture capital;
should only be held in a well-diversified portfolio).
This document is for information purposes only. We do not represent that
this information is complete or accurate. All opinions are subject to
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.
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- MF August 27th 2001.pdf