Enron Mail

From:david.morris@lehman.com
To:larimore@enron.com, jordan.larimore@lehman.com
Subject:The Morning Market Call - Thursday August 30th, 2001.
Cc:
Bcc:
Date:Thu, 30 Aug 2001 11:44:33 -0700 (PDT)

<<MF August 30th 2001.pdf<<


Abbreviated Call. - No Comments From The Local Guys!


The 30 -year bond yield is 5.36%.
The 10-year is trading at 4.77%.
The 5-year is trading at 4.32%.
Spot crude oil is trading at $26.65 p/b.
Natural Gas - Henry Hub - is trading at $2.38 p/mcf

IMPACT CALLS

Ivex Packaging(IXX) 3 - Market Perform J. Tiss, .212.526.3521
Cut Rating to Neutral On Big Price Run (A)
OLD NEW STREET P/E
Price: $19.35 EPS 2000 N/A $1.06 N/A N/A
52 Wk Ra: $20 - 8 EPS 2001 $1.20E $1.20E $1.22E 16.1
Mkt Cap: $394.7MM EPS 2002 $1.35E $1.35E $1.39E 14.3
FY: 12/31 Price Target $18 $18
Rank 2 3
*Cut rating on Ivex Packaging to 3-Neutral from 2-Buy based on a 227% price
increase in the past year and a valuation that appears
quite full.
*While we acknowledge that the earnings are still somewhat depressed and
price increases plus raw material cost declines will help
the next 2 quarters, these positives appear priced in.
*Stock currently at 7.9x '01 EV / EBITDA vs pack univ at 7.4x & 20-year
sector average of 7.5x.
*We continue to like the company a lot and believe that Ivex has done an
excellent job of creating longer term shareholder value and
will continue to deliver.
*End market demand appears slightly positive but is slow, although
restructuring and aggressive cost cuts should allow further
improvement in EPS.
*We are maintaining our $18 target (7.5x '01 EV / EBITDA), and our EPS
estimates of $1.20 and $1.35 in 2001 and 02 respectively.

FOCUS STOCKS

Caterpillar Inc(CAT) 3 - Market Perform J. Tiss, .212.526.3521
Recent News Flow Underlines Neutral Thesis
OLD NEW STREET P/E
Price: $51.17 EPS 2000 N/A $3.02 N/A N/A
52 Wk Ra: $57 - 30 EPS 2001 $2.62E $2.62E $2.71E 19.5
Mkt Cap: $17.8B EPS 2002 $3.00E $3.00E $3.45E 17.1
FY: 12/31 Price Target $50 $50
Rank 3 3
*With Caterpillar shares in the $50 range, they appear to be boldly
forecasting a solid snap-back in 2002 equipment demand--which is
far from certain.
*Deere shares in the low $40's are in roughly the same position although it
is easier to make a case for pent up demand in the farm
equipment sector following 3 lean years.
*It appears to be a good time to revisit out thesis and reexamine some of
the conclusions to see if they still stand up 6 months later and
if they are relevant for the next 12-18 mos.
*We remain comfortable with our neutral ratings on both Cat and Deere, buy
rating on Ingersoll Rand and strong buy rating on Joy
Global.

Sun Microsystems(SUNW) 3 - Market Perform D. Niles, .415.274.5252
Revs & GMs Even Worse Than Expected; EPS Cut By 47% (C)
OLD NEW STREET P/E
Price: $13.43 EPS 2001 N/A $0.44 N/A N/A
52 Wk Ra: $65 - 13 EPS 2002 $0.32E $0.17E $0.34E 79.0
Mkt Cap: $45.4B EPS 2003 $0.55E $0.34E $0.59E 39.5
FY: 6/30 Price Target N/A N/A
Rank 3 3
*Yesterday, Sun gave guidance that revs in the US were slightly below plan
with Europe and Japan the main culprits. They are now
forecasting revs to be below $3.7B with lower GMs and a small operating
loss. This is even worse than we previewed Monday. We
have lowered CQ3 revs from $3.9B to $3.5B, EPS from $0.02 to ($0.02), FY2002
revs from $18.0B to $15.9B and EPS from $0.32
to $0.17.
*Sun believes that this is not a company specific issue and that all
computer hardware vendors are having difficulties. IT demand is
significantly lower than 6 weeks ago and deterioration in the global economy
has affected sales cycles and the ability to close deals in
the pipeline.
*The macro issues in the US seem to be spreading to Europe and Asia for most
tech companies and we still have 50% of the quarter
left to do. This has been our thesis since early this year and we expect it
to get worse before it gets better. We remain cautious on the
computer hardware group.

COMPANY/INDUSTRY UPDATES
Altera Corp(ALTR) 3 - Market Perform D. Niles, .415.274.5252
No Surprise, 3Q Guidance Unchanged (C)
OLD NEW STREET P/E
Price: $29.96 EPS 2000 N/A $0.96 N/A N/A
52 Wk Ra: $67 - 19 EPS 2001 $0.38E $0.38E $0.36E 78.8
Mkt Cap: $11.9B EPS 2002 $0.40E $0.40E $0.38E 74.9
FY: 12/31 Price Target N/A N/A
Rank 3 3
*As we previewed on Tuesday, Altr reaffirmed Q3 guidance of revs down 15-20%
q/q and GMs of 63-64% and said nothing else.
Though we strongly believe they are tracking to the lower end of guidance we
did not expect a change in guidance given the back-end
loaded nature of Q3 and the hope that things improve.
*There were no details but given their poor August, there would not have
been much good to say. There is continued weakness in
their telecom end market as underscored by WorldCom group yesterday cutting
its cap ex for 2002 to $5.5 from $7.0B in 2001. In
the data processing end market, Sun confirmed that demand continues to
worsen and we are lowering revs by $2.1B for FY02 to
$15.9B.
*Xlnx will give their update on Sept. 10th and we expect no change in their
guidance (revs down 20-25% q/q) though things are
tracking to the higher end of their range which they should mention. Both
stocks remain expensive.
Oil & Gas T. Driscoll, .212.526.3557
Exploration & Production: Falling gas prices could hurt E&P's
*We continue to remain cautious about the outlook for natural prices (as
well as E&P share prices) because of growing natural gas
supply combined with weak natural gas demand. We believe that the average
E&P stock fairly discounts a long-term natural gas
price forecast of about $3/MMBtu - but with the September gas contract
falling as much as $0.165 to $2.25/MMBtu yesterday we
believe that near-term stock price performance is likely to be negative.
Investors are prepared for short-term natural gas price
weakness - however if the price gas-price weakness is sustained we believe
that E&P shares will be under increased pressure.

VeriSign Inc(VRSN) 2 - Buy I. Hernandez, .415.274.5395
Reiterating 2-Buy on Best Large Cap Idea (C)
OLD NEW STREET P/E
Price: $38.69 EPS 2000 N/A $0.32 N/A N/A
52 Wk Ra: $214 - 26 EPS 2001 $0.63E $0.63E $0.63E 61.4
Mkt Cap: $8.2B EPS 2002 $0.95E $0.95E $1.04E 40.7
FY: 12/31 Price Target $70 $70
Rank 2 2
*We are reiterating our 2-Buy rating and $70 price target. VeriSign remains
our top large cap idea and we would be aggressive buyers
at current levels.
*Recent pullback below $40 (40x FY02 EPS) provides great entry point to
establish positions.
*VeriSign remains one of a few companies able to provide investors with
revenue and EPS visibility due to its unique services model
and deferred revenue model. A major catalyst going forward for earnings
growth is our expectation of expanding operating margins
from 14.6% to over 30% by 2003.
*We believe the introduction of new top-level domains, ".biz" and ".info" in
Q4 provide catalysts to maintaining and increasing the
deferred revenue growth, an important metric with investors.
*We attribute yesterday's selloff to speculation re: the revenue
contribution of recently acquired Exault. After discussing the
acquisition with management we view the contribution as immaterial to our
model.

Paper & Forest Products P. Ruschmeier, .212.526.9898
MEA/W Merger Bullish For Consolidation Trend
*We recommend aggressive purchase of MEA (Strong Buy) and W (Buy) as the
announced combination between the companies
should create an estimated $1.95 BB ($9.83 per pro-forma share) of
shareholder value. The deal also supports our Strong Buy on SPP
and our Buy rating on BOW. Technical selling related to hedges on long
positions of MEA and W is possible on numerous large-cap
companies such as IP, WY, and GP but we view technical weakness as a buying
opportunity for fundamental investors.
*The MEA/W combo should create $1.95 BB of value (6.0X synergies of $325 MM)
or $9.83 per pro-forma share.
*Non-strategic asset sales are likely and we estimate rationalization of at
least 125K tons (1.2% U.S. supply) of coated paper capacity.
*We estimate only a 20% probability the deal is broken up.

Gaming & Lodging J. Minor, .617.342.4120
Lodging Industry RevPAR Falls Further in July, -6.0%
*Yesterday, Smith Travel Research released July lodging industry data
showing RevPAR declined further in July, down -6.0%, worse
than the -4.1% decline of June. The "upper upscale" segment where most
public companies are concentrated was down -10.9%
vs. -7.2% in June. While most lodging companies expected 3Q01 RevPAR results
to be slightly below 2Q01 levels, this is not an
auspicious start to 3Q01. With numbers like this, it's hard for us to say
you have to own the lodging stocks. But, we still expect our
downward earnings revisions will be less painful than the S&P's overall,
which should allow continued outperformance for the
lodging stocks. With the least downside risk, Marriott remains our favorite.
REITs with strong, safe yields like HMT and FCH are
also still attractive.

International Game Tech(IGT) 3 - Market Perform J. Minor, .617.342.4120
IGT - S&P 500 Add, FTC Inquiry, Maintain 3-Rating
OLD NEW STREET P/E
Price: $52.72 EPS 2000 N/A $1.77 N/A N/A
52 Wk Ra: $66 - 28 EPS 2001 $2.80E $2.80E $2.79E 18.8
Mkt Cap: $3.9B EPS 2002 $3.10E $3.10E $3.19E 17.0
FY: 9/30 Price Target N/A N/A
Rank 3 3
*Yesterday after the close, it was announced that IGT shares will be added
to the S&P 500 Index and removed from the S&P 400
Index. Our derivatives team expects a muted positive reaction in the shares.
Also, IGT announced that the FTC has requested
additional information on its proposed acquisition of SLOT. While such
information requests are common, it may signal that the
transaction will not just be "rubber stamped". We continue to see IGT's
earnings growth decelerating as current growth drivers abate
(California, new unit shipments) and we question other growth sources (no
acceleration in the replacement cycle). So, we reiterate
our 3-Market Perform and would use high volumes and price strength related
to the S&P 500 addition as an opportunity to pare
holdings.
*S&P announced that IGT will be removed from the S&P 400 and added to the
S&P 500. Our derivatives team expects a net buy of
3.941 mil shares, or about 4.3 days of volume. Our team notes that while an
S&P 500 addition is usually a positive, when combined
with a move out of the S&P 400, the reaction is generally muted.

Advanced Fibre Comm.(AFCI) 1 - Strong Buy A. Green, .212.526.3860
A Summertime Visit With Advanced Fibre (C)
OLD NEW STREET P/E
Price: $26.25 EPS 2000 N/A $0.59 N/A N/A
52 Wk Ra: $54 - 12 EPS 2001 $0.08E $0.08E $0.09E 328.1
Mkt Cap: $2.2B EPS 2002 $0.35E $0.35E $0.35E 75.0
FY: 12/31 Price Target $30 $30
Rank 1 1
*This note briefly highlights some of the datapoints from our meetings with
members of AFC's management team yesterday.
*The meetings could best be described as educational as much of the
discussion stemmed around the company's strategy, regulatory
issues in the market, AFC's manufacturing process, the competitive
landscape, and new technologies.
*We would point out, however, the that time spent was also reassuring as the
tone conveyed by management was both confident and
optimistic, and we saw products labeled for shipment to a number of
carriers, both international and domestic, including Sprint, a
number of Independents, as well as both Verizon and SBC.
*We continue to rate AFCI shares 1 Strong Buy and reiterate our $30 price
target.

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.


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- MF August 30th 2001.pdf